Reference no: EM132401225

Consider the dramatic reductions in transportation costs that took place during the 19th century. One consequence of this was increased trade in grains, the so-called "grain-invasion", from land-abundant Americas to labor-abundant Europe. O'Rourke et al. (1996)1 examine factor-price convergence between these countries in the late 19th century. Answer the following questions related to the paper.

a) In a 2x2x2 Heckscher-Ohlin world in which land and labor are the two factors of production and agriculture and manufacturing are the two goods, explain what you would predict for initial (high trade cost) factor price differences across Europe and the Americas. Make sure to explain relative factor abundances between countries and factor intensities across industries.

b) In what ways would you expect factor prices to evolve as trade costs reductions allow the two regions to become more integrated (think of this as a gradual move from autarky to free trade)?

c) Does the data support these predictions (Figures 1-3)? Why would you expect the effect on factor prices to be weaker in European countries that raised tariff barriers?