33 A. Suppose that a country, say Algeria, has more unskilled workers and less c

Question

33 A. Suppose that a country, say Algeria, has more unskilled workers and less capital than any other country in the world. Suppose also that there are two goods, textiles (unskilled-labor-intensive) and steel (capital-intensive). According to the long-run Heckscher-Ohlin model of trade, how does a shift from no trade to free trade change the following variables for Algeria (rise, fall, no change).

(i) output of steel ___________ output of textiles____________

(ii) wages for unskilled workers in the textile industry ___________

(iii) wages for unskilled workers in the steel industry ___________

B. Explain your answer to part (iii) (no need to explain the others)

C. Industry A has 4 companies with total sales of $10 billion and makes most of its sales to consumers. Industry B also has 4 companies with total sales of $10 billion, but it makes most of its sales to other industries (like most of the copper industry's sales are to manufacturing companies). According to the pressure group view of politics, the one our book emphasizes, in which industry would the US have the higher tariffs?

________________

            Explain why.

Explanation / Answer

A. If we use the heckscher ohlin model of trade, then we will find the wages of the factor of production which are abundant in a nation to be higher after trade. This is because this factor will be used intensively in the product which will then be exported by the trading Nation. Algeria has more unskilled workers and this implies that the capital intensive industry will not use on a skilled workers but the labour intensive industry will use them and hence the labour intensive industry will export its products. Textile is a unskilled labour intensive industry so we expect the nation to export textiles and import Steel.

Output of Steel will fall while output of textile will increase. Wages for the unskilled worker in textile industry will increase and wages for unskilled worker in steel will fall.

B. It has already been explained in part A that unskilled labour intensive industry is textile industry and heckscher ohlin model predict that the Industry that is intensive in the factor in which the nation is abundant will export the same and so the wages of those factor of production will increase. This implies that hear the wages of unskilled worker employed in textile industry would increase and those employed in steel industry would fall

C. The pressure group to view of politics will emphasize that the industry which supplies material to other manufacturing companies should not have higher tariffs but the industry selling directly to consumers should have higher tarrif. This is primarily because foreign competition would affect the domestic industries when consumer demand more imported goods. Hence there should be a higher price for imported goods to restrict their sales.

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