The Heckscher-Ohlin model is often used to understand the long-term effects of international

trade on the income distribution. Imagine a simple economy where there are only carpenters and

electricians working. They produce two goods: furniture and lamps. Both types of workers are needed

in the production of both goods but the furniture industry uses carpenters intensively and the lamp

industry uses electricians intensively. There are two countries: the Lowlands and the Highlands. In the

Lowlands there are many more carpenters per electrician compared with in the Highlands. Use the

Heckscher Ohlin model to answer the following questions.

a) Suppose that there is no trade. Describe how the relative wages of carpenters and electricians are

determined in the two countries. In which country is the relative wage of carpenters the highest?

Explain your answer. (1 Marks)

b) Describe how the relative goods prices of furniture and lamps are determined. Where are lamps

relatively more expensive? Explain your answer. (1 Marks)

c) Now assume that the two countries can trade. If we focus on the Highlands: how do relative wages

of carpenters and electricians change? Who benefits in real terms and who loses? Explain your answer.

(2 Marks)