Describe the controversy surrounding the HO model and the widening of

Describe the controversy surrounding the HO model and the widening of the American income gap.

What will be an ideal response?

ANSWER

Over the past three decades, real wages in America paid to blue collar workers have only risen slightly whereas real wages paid to college graduates have risen significantly. Many pundits claim that this income gap has been widening because of international trade, particularly as the U.S. has increased trade with developing countries such as China. The HO model predicts that low-skilled wages should fall towards wage rates paid in developing countries.

Some economists have suggested that it is the rapid pace of technological change that has reduced the demand for low-skilled workers, leading to the reduced wages and employment levels in this sector. Other economists, such as Paul Krugman, suggest that trade is increasingly more responsible for expanding the income gap.