1. We have used the specific-factors model to study the effects of both goods trade and international factor mobility. The following questions ask you to compare these effects. Use the version of the model with tech and manufacturing goods, where skilled labor is used in tech and unskilled labor is used in manufacturing. The equilibrium conditions require each factor to be paid the value of its marginal product:

w_M = p_MMPL_M

w_T = p_T MPL_T

R = p_M MPK_M = p_T MPK_T

Recall also that each of these marginal products depend only on the industry’s ratio of capital to labor: a higher capital-labor ratio in an industry lowers the marginal product of capital but raises the marginal product of labor.

Assume that Home has a comparative advantage in Tech and so imports the manufactured good. Use the diagram with two industries’ value-of-marginal-product curves.

a. Suppose first that the country experiences increased “import competition,” modeled as a reduction in the world price of the manufactured good. (There is no change in p_T.) In your diagram, show how this change shifts the appropriate curve, and identify the change in the allocation of capital between the two industries.

b. Using your diagram and the equilibrium conditions given above, explain how this increased import competition affects the real skilled wage, real unskilled wage, and real rental on capital. (Measure each real factor price in two ways, one by dividing it by p_M and the other by dividing it by p_T.) For your explanation, you will need to demonstrate how the capital-labor ratio is changing in each sector, and how this change is affecting the relevant marginal products.

c. Instead of import competition, suppose now that some number of unskilled workers immigrate to the country, that is, there is now more “competition” from unskilled immigrants. Using another diagram, show how this immigration shifts the appropriate curve, and identify the change in the allocation of capital between the two industries.

d. Using your diagram and the equilibrium conditions given above, explain how this immigration affects the real skilled wage, real unskilled wage, and real rental. What differences, if any, are there between your answer and the effects of the increased import competition analyzed in parts (a) and (b)?