The Heckscher-Ohlin (HO) theorem and the Stopler Samuelson (SS)

Q1. Answer the following questions regarding the effects of trade on factor returns
(50%)
a) State and explain the Heckscher-Ohlin (HO) theorem and the StoplerSamuelson (SS) theorem.
b) Using appropriate diagrams, describe the main assumptions and the trade
equilibrium of the foreign offshoring model.
c) It was found empirically that wages of skilled workers have risen relative to
unskilled workers in both industrialized and developing economies in the last
few decades when the world has become more globalised. Is this empirical
phenomenon better explained by the Foreign Outsourcing model or by the
Heckscher-Ohlin model? Explain.
Q2. Answer the following questions regarding the gains from trade (50%)
Firstly consider a model of small open economy producing n goods under a
bowed-out production possibility frontier.
(a) Suppose n=2. Explain the Slutsky welfare measure of the gains from trade,
and discuss how this measure could be affected by the terms of trade (ToT).
(b) Using the natural experiment of Japan’s opening to world trade in the 1850s,
explain how to empirically estimate the magnitude of comparative advantage
gains from trade when n>2.
Now Consider the Krugman intra-industry model between two symmetric
countries
(c) Using appropriate diagrams, explain the sources of gains from trade in this
model.
(d) Explain why the sources of gains from the Krugman model is very different
from that from the small open economy model above.