Explain the mechanism referred to in the above statement...

â€Å"Trade between advanced countries that are abundant in capital and skill and NIEs (Newly Industrialising Economies) with their abundant supply of unskilled labour was raising the wages of highly skilled workers and lowering the wages of less-skilled workers in the skill- and capital-abundant countries † (Krugman, Obstfeld and Melitz). Explain the mechanism referred to in the above statement using the Heckscher-Ohlin model. The Heckscher-Ohlin model is extremely useful when illustrating how endowments of a particular resource can influence trade between economies. The model shows us how comparative advantage is explained somewhat by the relative abundance of certain resources, such as land, labour or capital. The Heckscher-Ohlin (HO)†¦show more content†¦Assuming the demand schedule is identical in both countries, then without trade, Foreign’s own market equilibrium is at ‘1’ and Home’s equilibrium for cars is at ‘2’. When the two countries trade, the relative ‘world’ price converges to a point somewhere in between these two points at ‘3’. We can see from the above illustration that trade leads to a convergence of world prices at point 3. The Foreign economy will therefore export the good that has seen an increase in its relative price. Now that we have seen how prices change under the assumptions of the HO model, I will now explain how these changes have an impact on the distribution of income in countries open to trade. A rise in the prices of cars increases the purchasing power of skilled labour (the abundant factor) in the foreign country in terms of both goods. At the same time it decreases the purchasing power of unskilled labour (the scarce factor) in terms of both goods. So by opening up to trade, the owners of the abundant factor become better off, whilst owners of the scarce factor become worse off. Theoretically, opening to trade should increase the consumption possibilities for the whole economy, allowing everyone to gain a higher utility. So why do some people become worse off, post-trade under the HO model? The underlying issue is that trade only changes relative prices of factors, which has a direct effect on the relative earnings of thoseShow MoreRelatedIbe International Business Questions Essay example9943 Words   |  40 Pagesa result, during the twenty-first century the triad will be of central importance in the study of international business. 7. Does outsourcing to low wage countries benefit or hurt the home economy? Outsourcing can be domestic or offshore. Using domestic sources for raw materials and components allows a company to avoid problems with language differences, distance, currency, politics, and tariffs, as well as problems. However, for many companies, domestic sources may be unavailable or mayRead MoreEffect of Internal Controls on Financial Performance11978 Words   |  48 Pagesvariables and their impact on performance (Bamford et al., 2004). However, in order to be able to analyze and model the performance of new ventures and SMEs, the complexity and dynamism they are facing as well as the fact that they may not be a homogenous group but significantly different in regard to many characteristics (Gartner et al., 1989) have to be taken into account. In line with the above, there have been challenging debates all over the world on the role played by Small and Medium EnterprisesRead MoreTrade Openness and Economic Growth in Nigeria23422 Words   |  94 Pagesperiod of 1970 – 1985, import substitution industrialization (ISI) strategy was a dominant feature of trade policy in Nigeria. The trade policy was generally inward oriented. Under this ISI strategy, â€Å"Infant† manufacturing industries were protected using high tariffs, import quotas, and other trade restrictions like import licensing. Non-tariff barriers to trade such as import prohibitions were also utilized. During this period, trade policy was also adjusted in response to the exigencies of the balanceRead MoreAN EMPIRICAL ANALYSIS OF ENVIRONMENTAL IMPACT OF FOREIGN DIRECT INVESTMENT IN THE MINING SECTOR IN NIGERIA15805 Words   |  64 Pagescontribution to dealing with the legacy of abandoned mines (Balkau and Parsons, 1999). It is from this foregoing th at the study is set to critically analyze the environmental impact of foreign drect investment in the mining industry in Nigeria. 1.1 Statement of the Problem The mining industry has traditionally been a major recipient of foreign direct investment in sub- Saharan Africa (Nigeria inclusive), and has commonly been an important foreign exchange earner for the region. Over the forty years