1. Consider an economy consisting of two industries and two factors of production. The two industries are manufacturing

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1 Consider An Economy Consisting Of Two Industries And Two Factors Of Production The Two Industries Are Manufacturing 1 (110.35 KiB) Viewed 14 times

1. Consider an economy consisting of two industries and two factors of production. The two industries are manufacturing (labeled as 1) and agriculture (labeled as 2), and the two factors of production are unskilled labor (labeled as U) and skilled labor (labeled as S). Manufacturing (industry 1) Agriculture (industry 2) Sales revenue P₁Q₁ = 100 P₂Q₂ = 100 Here, P₁ and P₂ are respectively prices of manufacturing and agricultural goods, Q₁ and Q₂ are respectively output of manufacturing and agricultural goods, Wy is wage of unskilled labor and ws is wage of skilled labor, Lu₁ is population of unskilled labor in industry 1, and L5₁ is population of skilled labor in industry 1, and so on. The cost share of each factor in each industry is given by Ou₁, 051, 02, 052. For example, Ou₁=₁=0.4 is the cost share of unskilled labor in industry 1. We define the other cost shares in a similar way. ΔΡ, P₂ As a result of a boom in global demand combined with reductions in tariffs and transport costs, price of manufacturing and agricultural goods rise. Specifically, price of manufacturing rises by 20%, and price of agriculture rises by 15%, that is, = 0.20 and ² = 0.15. AP₂ P₁ P₂ As we derived in the lecture notes, it can be shown ΔΡΑ ΔWU P₁ WU = Earnings of unskilled WuLu = 40 WyLuz = 50 ·= OU₁ that: +0S1 AWU Buz Wu Aw's Ws + Earnings of skilled WsLs1 = 60 WsLs2 = 50 052 Δws Ws Use these two equations and solve for unknown changes to wages of unskilled and skilled labor. Use your numerical solution to explain the implications for real wage inequality. Note: This question is a numerical example of what it is referred to in the trade theory as Stolper-Samuelson theorem.