Question 1. This question helps you review the main graphs of the Heckscher-Ohlin model. (10 points)
Consider the following Heckscher-Ohlin model. There are two countries, Home and Foreign. They produce merchandise and service using skilled labor and unskilled labor. The Home country is skilled-labor abundant, and service is skilled-labor intensive. Consider the changes that take place in the Foreign country as it goes from closed economy to free trade. Assume that the price of service decreases while the price of merchandise remains unchanged.
(1) Graph the relative demand curves for skilled labor for merchandise and service. Be sure to label your axes and label your curves. (Hint: the vertical axis is skill premium, or skilled-labor’s wage relative to unskilled-labor’s wage. The horizontal axis is skilled-labor intensity, or skilled-labor’s employment relative to unskilled-labor’s employment.) (4 points)
