Share
Explore BrainMass

Comparative advantage and capital-to-labor ratios

Consider the economy of United States and Mexico. There are two goods, computer chips and tequila, and two factors of production, skilled and unskilled workers. Computer chips are relatively intensive in skilled labor, and there are no technological differences between both countries. Initially there is no trade.

See attached file for full problem description.

Attachments

Solution Preview

a. Economics predicts that resources as well as goods will flow from where they are in relative abundance to where they are in relative scarcity. Given that there are no costs associated with migration, this means that all laborers will quickly relocate to the country where they can obtain the higher wage. If we assume as in the previous problem that Mexico has an abundance of unskilled labor and a dearth of skilled laborers then unskilled labor will move to the US, and skilled laborers will move to Mexico.

b. Skilled and unskilled laborers would stop migrating when their wages are equal in both countries. In the Ricardian framework, this means that people will tend to flow ("migrate") from poor countries to ...

$2.19