30 Apr Question: This exercise analyses the effects of immigration in a Heckscher– Ohlin model. The island of Kaua…
This exercise analyses the effects of immigration in a Heckscher– Ohlin model. The island of Kauai in the Pacific Ocean produces two goods using skilled and unskilled labor. Naturally, Kauai can be considered a small economy and a wise government has led to complete trade liberalisation.
(a) In the initial situation in which trade in final goods is free, Kauai produces both goods. The technology is characterized by the absence of factor intensity reversals. How can you determine the factor prices prevailing in the country?
(b) The country has now received a limited inflow of unskilled immigrants. The island of Kauai continues to produce both goods in the free trade equilibrium. What are the effects of immigration on the return to domestic workers?
(c) Assume now instead that the immigration flows are substantial, so that Kauai ends up specializing in the production of the goods that is intensive in the use of unskilled labor. What are the effects on domestic worker’s income?
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