There are two countries, Home, and Foreign. Each country can produce two goods, computers and toys, with two factors of production, skilled-worker (S) and unskilled- worker (U). Both factors are fully mobile across industries within a country. Assume all the standard assumptions of the Heckscher-Ohlin model:
• Perfect competition.
• Frictionless trade.
• Identical technology between countries.
The production function in computer industry is Qc=Uc0.25Sc0.75
and the production function in the toy industry is QT=UT0.75ST0.25
where QC is the quantity of computers produced, QT is the quantity of toys produced. SC is the number of skilled workers employed in the computer industry, and ST is the number of skilled workers employed in the toy industry. Similarly, UC is the number of unskilled workers employed in the computer industry, and UT is the number of unskilled workers employed in the toy industry. Assume that the foreign country has the same production functions.
The total number of skilled workers in the Home country is 30, and the total number of unskilled workers in the Home country is 120.
Suppose that in both countries, the utility function of the representative consumer is:
U = (DCDT)0.5
where U is the level of utility, DC is the quantity of computers consumed, and DT is the quantity of toys consumed.
We define the skill premium, μ, as:
where WS is the nominal wage rate for skilled workers, and WU is the nominal wage rate
for unskilled workers.
2. Suppose that in autarky equilibrium, the price of computers in the Home country, PC = 1. What is the price of toys in the Home country, PT ?