$1.$ Suppose the world has just two countries $($North and South$).$ Assume a specific factors framework. There are two industries $--$ High tech $($H$)$ and Low tech $($L$).$ H is produced with capital $($K$)$ and skilled labour $($S$).$ L is produced with capital and unskilled labour $($U$).$ Capital is fully mobile between sectors$.$ The other two inputs cannot move between sectors$.$ S is used only in H $,$ and U is used only in L $.$

World prices are determined by global relative supply and demand $-$ or equivalently you can use an import demand and export supply diagram. North imports $\backslash ($ L $\backslash )$ and exports $\backslash ($ H $\backslash ).$

Suppose North imposes an export tax on H$.$ The tax is t per unit of H exported.

$($a$)$ Use a diagram to show what happens to the world price of H $($the price that South pays North for its imports of H $),$ and the domestic price of H in North.

$($b$)$ What happens to the real returns to $\backslash (\backslash$mathrm$\{$K$\},\backslash$mathrm$\{$S$\}\backslash )$ and U in the North? Use a diagram to illustrate your result. Explain the economic intuition for your result.

$($c$)$ What happens to the real returns to $\backslash (\backslash$mathrm$\{$K$\},\backslash$mathrm$\{$S$\}\backslash )$ and U in the South? Use a diagram to illustrate your result. Explain the economic intuition for your result.