Assignment #2
1. As a result of the North America Free Trade Agreement (NAFTA), the United States and
Canada have shifted to free trade with Mexico. It is assumed that Mexico has an
abundance of unskilled labor while the United States and Canada have an abundance of
skilled labor. According to the Stolper-Samuelson theorem, how will this shift affect the
real wage of unskilled labor in Mexico and the real wage of unskilled labor in the United
States and Canada? Also explain the impact on the real wage of skilled labor in Mexico
and skilled labor in the United States and Canada.
According to the Stolper-Samuelson theorem, the owners of the factors of production that
are abundant in a country would benefit from an opening of trade through agreements
such as NAFTA, while the factors that are scarce in the country would suffer.
In Mexico’s case, unskilled labor is abundant, meaning the country has a comparative
advantage at producing products that rely on such a form of labor and would be able to
produce higher quantities. As a result, the demand for unskilled labor will rise in Mexico,
thus increasing the wages for unskilled workers as a result. The US and Canada are scarce
