free trade
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Please help with the following problems.
Consider the same setup as previous questions, but instead of introducing free trade (free movement of goods and services), we introduce free mobility of skilled and unskilled labor.
(a) In what direction will unskilled labor migrate? What about skilled labor? Why?
(b) When would skilled and unskilled labor stop migrating across borders?
(c) At that point, would it still pay off to introduce free trade? Why or why not?
(d) "Free trade is a substitute for the mobility of factors of production." Explain.
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Solution Summary
Factors of free trade are articulated.
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(a) Unskilled labor would start immigrating to the country where they could earn more. It would be beneficial to the host country (since they would work for wages significantly less than the native population of the host country thus increasing the net income in the host country) until the moment when the overall income in the country starts to decrease, which in turn would bring down the gain from using immigrated unskilled labor. The ...
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