Many reasons for why the United Kingdom voted to leave the European Union have been proposed. A common one is that imports from the EU hurt low-skilled British workers. This question will ask you to analyse what effect Brexit (the UK's exit from the EU) may have on relative wages for high-skilled and low-skilled workers in the UK using the Heckscher-Ohlin model of international trade.

Assume a two-country world- i.e. United Kingdom and the EU. Suppose that there are two industries: financial services and manufacturing. Further assume that there are two factors of production, low-skilled and high-skilled workers, and that finance is high-skill intensive and manufacturing is low-skill intensive. Further assume that the United Kingdom is abundant in high-skill labour (i.e. it has relatively more high-skilled workers than the rest of the EU).

a. With the help of a diagram, use the Heckscher-Ohlin model to explain which industry both countries have comparative advantage in. (8 Marks)

b. With the help of a diagram, use the Heckscher-Ohlin model of international trade to explain how relative wages for low-skilled and high-skilled workers are determined when there was free trade between the United Kingdom and the EU (pre-Brexit Era).

(7 Marks)

c. Now suppose that the UK leaves the EU (post-Brexit era). For simplicity, we will assume the post-Brexit era as autarky condition, i.e. that all trade between the UK and the EU stops. How do real wages of low-skilled and high-skilled workers change? Use the diagram in part (b) to support your explanation