Question

True or False. Draw a graph (such as supply and demand diagrams) to support your answer:

Free trade with China hurts the US economy because Chinese workers are willing to work at lower wages compared with US workers.

Answer 1

False.

reason: Goods produced in China will be cheaper than those in the U.S. because labor is cheaper in China. As a result, free trade with China will benefit the U.S. Due to comapartive advantage of China, US will gain. Availability of those goods in the U.S. market will be at a lower opportunity cost.

  

As we see in the graph, Qus is the domestic level of production, Pus is the domestic price. Due to lower wages in China, Pch is the price of Chinese goods in the US. Because of the lower price, demand rises to Qd. In other words, consumers get more goods at a cheaper price. If the U.S. were to produce Qd quantity of the same good, they would charge the price P1 for it. This is because the opportunity cost of producing Qd quantity of goods would be higher in the U.S. Now the same resources can be put to better use by the U.S. producers somewhere else.

Thus, domestically, Qs is the level of quantity produced. Qd - Qs is importd from China at Pch price.

Consumers gain because more goods are available cheaper. Producers are happy because they can employ the saved resources at a lower opportunity cost. Thus, the social surplus increases. The U.S. benefits from this trade.