ECON
The-Incredibles-2nd-Assignment.docx

While the organised workers received higher salaries

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While the organised workers received higher salaries during inflation, the unorganised ones (such as agriculture and cottage industries) had much lower income as their salaries were unchanged. Since the fall in purchasing power, the poor people had to suffer a lower standard of living (Suman n.d). Question 3 Part a. The basics of the H-O model with two factors of production, namely skilled and unskilled labour. The Heckscher-Ohlin (H-O) model is used to explain the differences between comparative costs of production. In other words, given the underlying factors of production, the H-O model implies how country should use it comparative advantage to maximize their profits (Mukher 2006). To explain, let France and India are taken into the two-country of H-O model. Based on assignment 1, France is a country with the skilled-labor intensive which has the higher amount of skilled labors. Meanwhile, India is a country with the unskilled-labor abundant which has more unskilled labors. Assume that consumers from both countries demand for the same preferences and goods which need the identical factors of production. Moreover, they both have identical technology capacity to produce leather and perfume. However, the production costs of each product are different in each country, specifically, the skilled-labor abundant country will require a lower cost for the products that requires more skilled labors to produce, and vice versa. As each country has their own endowments, hence the prices for each product are also different between France and India.
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THE INCREDIBLES 10 For application, leather is an unskilled-labor intensive, hence India (the unskilled-labor intensive country) will have comparative advantage in this industry. Under free trade, India will export leathers with the higher price to generate profits, while France imports leathers from India with a lower price as compared to under autarky. Similarly, perfume is skilled-labour intensive which France has more comparative advantage than India. Thus, under free trade, France will export perfume at a higher price than under autarky to gain profits, meanwhile India is able to import perfume at a lower price. How the H-O-S theorem works in this model In the basis of Heckscher-Ohlin model, price factors are recognized by the output prices at zero-profit condition, in which the total revenue generated is equal to total cost. Based on that, Stolper–Samuelson theorem (H-O-S theorem) was developed, which states that the increase in the relative price of a given product will result in the increase in the real income of the factor which is intensively used, and simultaneously reduce the real income of the other factor. Thus, the trade openness both increases the real income of the country’s abundant factor and decrease the real income of the scarce factor of that country (Bittencourt 2003). Therefore, it can be concluded that the trade-off in real income helps the abundant factors of a country to gain more from trade, while the scare factors tend to lose from trade.
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