EC3355: INTERNATIONAL TRADE Quiz 4 e All questions have the same weight. e Graphs need not be drawn to scale. There are two countries, Home and Foreign. High-skill labour and low-skill labour are the only factors of production. The Home country is high-skill abundant and the Foreign country is low-skill abundant, i.e. H/L > H*/L* where H and H* denote the high-skill workers in the Home and Foreign countries, respectively, and L and L* denote the low-skill workers in the Home and Foreign country, respectively. There are two goods, smartphones and clothes. The production of clothes is intensive in low-skill labour. When smartphones are produced in a single location, their production is intensive in high-skill labour. The production of a smartphone can be split into separate activities. Some of these activities require high skills (R&D, microchips) and some require medium skills (case, assembly). 1. Suppose that the Home and Foreign countries are in autarky (no trade). Describe whether the relative price of smartphones is higher or lower in the Home or the Foreign country and explain why. 2. Describe the labour market for the two countries under autarky: on a graph with the ratio of high-skill labour to low-skill labour (H/L) on the horizontal axis and the ratio of high-skill wage to low-skill wage (W /W) on the vertical axis, depict Home's no-trade economy-wide relative demand (RD) and relative supply (RS) of high-skill to low-skill labour and show the no-trade equilibrium wage-rental ratio. Do the same for the Foreign country in a separate graph. Suppose that the Home and Foreign countries start trading with each other and that trade is restricted to final goods, i.e. clothes and smartphones. 3. Describe which good will be exported by the Home country and which good will be exported by the Foreign country and explain why. Describe how the world relative price of smartphones in the free-trade equilibrium compares with the autarky relative price in the Home and Foreign countries. 4. Depict the effects of free trade on the two graphs that describe the labour market of the Home and the Foreign countries. Does the relative demand for high-skill labour increase or decrease in the Home country? What about the Foreign country? What is the effect of free trade on the relative wage of high-skill workers in each country? 5. Policy-makers in the Foreign country believe that a high-skill labour force is an im- portant precondition for the country's long-run economic development. Based on the results derived above, does opening up for trade increase the incentives for workers to accumulate skills in the Foreign country? Does opening up for trade encourage the Foreign country's long-run development? Explain your answer. Suppose that the production of smartphones can be split in its constituent activities and each activity can be offshored to the country where it is produced more efficiently. For the following answers, assume that all clothes production is taking place in the Foreign country. 6. Which activities will be done in the Home country and which will be done in the Foreign country? Explain your answer. 7. Depict the effects of offshoring on the two graphs that describe the labour market of the Home and the Foreign countries. Does the relative demand for high-skill labour increase or decrease in the Home country? What about the Foreign country? What is the effect of offshoring on the relative wage of high-skill workers in each country? 8. Answer question [5| again, but this time about the effects of offshoring on long-term development