Reference no: EM133082420

In 2001, China joined the World Trade Organization. As a condition for membership, the Chinese government was forced to undertake a series of trade liberalization reforms. China is a relatively labor-abundant economy, engaged in the production of manufactures, M (which uses labor intensively in its production) and electronics, E (which uses capital intensively), engaged in trade with the United States. Let China be the home economy and the U.S. be the foreign economy (indicated by an asterisk). We therefore assume ?? ?? > ?? ∗ ??∗ and ?????? ?????? > ?????? ??????

(a) Using the Heckscher-Ohlin model, describe, with graphs where necessary, what happens to relative goods prices before and after trade liberalization in China.

(b) Using the Heckscher-Ohlin model, describe, with graphs where necessary, what happens to the wage-rental rate in the United States before and after trade liberalization in China.

(c) What does the Heckscher-Ohlin model predict for the employment of labor in China and the United States after trade liberalization?

(d) Why might this pattern of trade not be realized in the real world?