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Consider a Heckscher-Ohlin-Samuelson model of trade with two countries: Home (H) and Foreign (F); two goods: books (B) and guitars (G) and two factors of
Consider a Heckscher-Ohlin-Samuelson model of trade with two countries: Home (H) and Foreign (F); two goods: books (B) and guitars (G) and two factors of production: skilled labour (S) and unskilled labour (U). Country H is relatively abundant in unskilled labour. Guitar production is relatively intensive in skilled labour. For this economy we can use analogs of the relative labour (to capital) demand and supply diagrams we used in class which, for this question, will be relative skilled labour (to unskilled labour) demand and supply diagrams. Use these types of diagrams to demonstrate that this model makes a prediction which is consistent with what we actually observe: moving from autarky to trade increases wage inequality between skilled and unskilled labour in some countries but decreases wage inequality in other countries. Provide economic intuition to explain the economic forces behind the increase in wage inequality in one of the countries when it moves from autarky to trade
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