1. As a result of the North American Free Trade Agreement (NAFTA), the United States and Canada shifted toward free trade with Mexico. According to the Stolper– Samuelson theorem, how is this shift affecting the real wage of unskilled labor in Mexico? In the United States or Canada? How is it affecting the real wage of skilled labor in Mexico? In the United States or Canada?
2. “The factor-price equalization theorem indicates that with free trade the real wage earned by labor becomes equal to the real rental rate earned by landowners.” Is this correct or not? Why?
3. “Opening up free trade does hurt people in import-competing industries in the short run. But in the long run, when people and resources can move between industries, everybody ends up gaining from free trade.” Do you agree or disagree? Explain.
4. One of your relatives suggests to you that our country should stop trading with other countries because imports take away jobs and lower our national well-being. How would you try to convince him that this is probably not the right way to look at international trade and its effects on the country?
5. The empirical results that Leontief found in his tests are viewed as a paradox. Why?
6. Consider our standard model of the economy, with two goods (wheat and cloth) and two factors (land and labor). A decrease now occurs in the relative price of wheat. What are the short-run and long-run effects on the earnings of each of the following: Labor employed in the wheat industry? Labor in the cloth industry? Land used in the wheat industry? Land in the cloth industry?
7. In shipbuilding there are two types of ships. Producing basic bulk-carrying ships is labor intensive. Production of complex ships, including the largest container ships and very deepwater oil-drilling ships, depends more on technical skills and design capabilities. Both China and South Korea have large shipbuilding industries. China’s factor endowments are shown in Figure 5.3, and comparable data for South Korea, reading across the columns, are 2.3%, 2.6%, 0.7%, 0.1%, 0.1%, 0.0%, 0.0%, and 0.2%. If China exports mostly basic bulk-carrying ships and South Korea exports mostly complex ships, is this pattern consistent with the Heckscher–Ohlin theory?
8. Indian exports of computer software development services have grown rapidly since the early 2000s. In the early 2000s the cost to employ programmers in India was about half the cost of programmers with comparable skills in the United States. In 2013 the cost in India was about two-thirds the cost in the United States. What trade theory or theories help us to understand the change?