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Effects on the distribution of income

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1. International trade often has strong effects on the distribution of income within countries, so that it often produces losers as well as winners. Discuss the statement above.

2. Why would a country opt for free trade when some workers remain unemployed in the import-competing sector? Given the real wage rate in Thailand is higher than that in Bangladesh, how would international trade affect real wages between them under a perfectly mobile labor movement? Discuss the answers.

3. Consider an H-O economy in which there are two countries (US and France), two goods (wine and cheese) and two factors (capital and labor). In each question below you are given partial information about the model and asked to infer some other part. Treat each question separately and independently.

a. Assume the US is labor-abundant and cheese is labor-intensive. What is the pattern of trade in free trade? (State what the US and France import and export). Which theorem is applied to get this answer? Explain.

b. Suppose an increase in the labor force in the US causes cheese production to increase. Which factor is used intensively in wine production? Which H-O theorem is applied to get this answer? Explain.

c. Suppose a decrease in the price of cheese causes a decrease in the wage rate in the US economy. Which factor is used intensively in cheese production in France? Which H-O theorem is used to get this answer? Explain.

d. Suppose France exports wine, the capital-intensive good. Which factor benefits from free trade in the US? Explain.

e. Suppose workers in France benefit when tariffs are increased on cheese imports. Which factor is used intensively in cheese production? What is France's abundant factor? Explain.

Reference no: EM133126502

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