Assume that in country ABC there are two factors of production: Skilled labor an
ID: 2506716 • Letter: A
Question
Assume that in country ABC there are two factors of production: Skilled labor and unskilled labor. Also assume that these factors of production are used to produce only two goods: Computers and Home Furniture.
Computers are intensive in using skilled labor and home furniture are intensive in using unskilled labor. Make the assumption of diminishing marginal productivity for both factors of production. Using a Heckscher-Ohlin model (and the assumptions that come with the model) explain very carefully in writing and using graphs (all necessary graphs including the Edgeworth box) what will happen to the relative production of these two goods if relative price of goods remains constant and the supply of skilled labor increases due to immigration. What will happen to the relative wage?
Explanation / Answer
Allowing skilled workers to migrate to skilled-labor scarce countries and unskilled workers to migrate to unskilled-labor scarce countries reduces the ratio of skilled/unskilled workers in the skilled-labor-abundant country and raises it in unskilled-labor-abundant country. This increases the wage ratio between skilled and unskilled labor in the skilled-labor-abundant country and lowers it in the unskilled-labor-abundant country. When the two countries trade in goods that embody these factors, the skilled-labor abundant country will export the skilled-labor-intensive good. By doing so, it effectively sends a lot of skilled workers and a few unskilled workers to the unskilled labor- abundant country. Likewise, when it imports the unskilled-labor-intensive good, it effectively imports a few skilled workers and a lot of unskilled workers. The net effect is skilled workers in the unskilled-labor-abundant country see a fall in their wage relative to unskilled labor and unskilled workers experience a rise in their relative wage, similar to that of migration.