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Suppose the United States and China are the only two countries in the world making cars and food. Suppose that everyone in the world spends half their income on each good. Suppose there are 10 units of skilled and 16 unskilled labor in China and 16 units of skilled labor and 10 units of unskilled labor in the US. The technology is such that at any factor prices, cars are intensive in their use of skilled labor. You can alternatively use the skilled and unskilled unit labor requirements in the two goods, cars and food, given in the table below.

Factor /Good Food Car

Skilled  1       2

Unskilled  2       1

a. What happens to the price of cars relative to food in each country without trade compared to with trade?

b. What happens to factor prices in each country without trade compared to with trade? Why?

c. Can trade explain the increase in the skilled wage relative to the unskilled wage that has occured wordwide in both countries?

d. Explain what might be able to do so.

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