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Assume a Heckscher-Ohlin model of trade. Australia (AUS) and Indonesia (IDN) produce pipes (P) and fish products
Assume a Heckscher-Ohlin model of trade. Australia (AUS) and Indonesia (IDN) produce pipes (P) and fish products
(F) using two factors, capital (K) and labour (L), which are mobile across sectors. Australia has 75 units of labour and 150 units of capital, while Indonesia has 80 units of labour and 40 units of capital. The production of pipes is capital intensive and that of fish products is labour intensive. The cost of labour is w. The cost of capital is r
d. In the diagram below draw the economy-wide relative supply of labour and the relative demand of labour for Indonesia. Label them RDl and RSl. Clearly label the equilibrium w/r ratio.
Now, suppose Australia and Indonesia are free to trade. e. Show and discuss how free trade affects both the economy-wide relative supply and relative demand of labour in Indonesia using the graph drawn for question d. How does the w/r change in Indonesia? f. Will the change in w/r make Indonesian production techniques more or less labour intensive than in autarky? Briefly explain your answer. g. How does free trade change the real wage and the real returns to capital in Indonesia? Explain your answer in detail.
Wage/RentalRelative demand forlabor in fishes, LIKERelative demand forlabor in pipes, LyLabor/capital in each industry