Question

（True or False questions, please provide reasons) Consider the following Heckscher-Ohlin model. France and Italy produce wine and bread. Bread is capital intensive, while wine is labor intensive. France is capital abundant, while Italy is labor abundant. Assume that going from no trade to free trade, the price of wine rises by 10% for Italy, while the price of bread remains unchanged.

(1) The wage of all Italian workers increases by more than 10%.

(2) The Italian workers’ real wage for bread increases by more than 10%.

(3). In Italy, the rental rate decreases.

Answer 1

1)going from no trade to free trade if the price of wine rises by 10% for Italy, while the price of bread remains unchanged. then The wage of all Italian workers increases by more than 10%. the statement is true

2)The Italian workers’ real wage for bread increases by more than 10%. as after trade itally is specialised in the production of wine and importing bread and still its price remains the same the italian workers real wage for bread increases by more than 10%.

3) in itally the rental rate decreases, the statement is false because the the price of wine for itally rose by 10% while the price of bread remains unchanged, and as rent is the reward for capital it has not declined in this case.