Trade Models

1. Workers in the U.S. earn much higher wages than those in Africa. How can products produced by high-wage workers in the U.S. compete with products manufactured by African workers who earn much lower wages? Apply the Ricardian Model to answer this question.

Hint: Is it possible for the U.S. to both have higher wages and a comparative advantage in a good? You may want to a numerical example to illustrate your point.

In the last several decades, increased participation in international trade by the U.S. has been accompanied by increased income/wage inequality. First, use the Heckscher-Ohlin Model to explain the association between increased trade and increased income/wage inequality (hint: think about two factors of production, skilled labor and unskilled labor). Second, some economists doubt that increased trade has led to increased inequality. Do some research and summarize their ideas (please cite your sources). Third, based on your research, present your own view of whether trade has contributed to increased inequality in the U.S., and defend your view.

When increasing returns to scale is introduced to trade theory, we find many results that are distinct from those in traditional trade theory (such as the Ricardian Model and the Heckscher-Ohlin Model). Please list two new results that arise from trade theory based on economies of scale.