Question

2. The country of China produces rice (R) and computers (C). Rice is produced using land and labor, and computers are produced using capital and labor. Land and capital are specific to their respective sectors, and China has a fixed supply of labor that is perfectly mobile between rice and computer production (and is only employed in these two sectors).

a. Draw a single graph of the Chinese labor market in autarky, depicting each sector’s demand for labor and the equilibrium wage rate. Clearly indicate what each part of your graph represents.

b. Suppose China opens up to trade. China has a comparative advantage in rice production, and in moving from autarky to free trade, the price of rice rises by 30% and the price of computers falls by 10%. On your graph in part a, show the effect of this change on the number of workers employed in each sector and the equilibrium wage rate.

c. Which factor(s) of production will unambiguously favor free trade, and which factor(s) will unambiguously oppose free trade?

Answer 1

China produces rice and computers . Rice is produced using land and labor and computers are produced using capital and labor. Rice is labor intensive commodity and computer is capital intensive commodity. Land and capital are specific to their respective sectors. But China has a fixed supply of labor and that is perfectly mobile between rice and computer a. Chinese labor market in autarky is equilibrium at point f where labor demand curve Ld and labor supply curve Ls intersects at W is equilibrium level of wage rate and L level of labor employed b. Suppose China opens up to trade. China has comparative advantage in rice production ,and in moving from autarky to free trade ,the price of rice rises by 30% and price of computers falls by 10 % .Because when China started to focus on the production of rice , PR /PC will increase. it will increase the demand for labor in the rice industry. So the labors in computer industry will demands higher wages ,so they transfer labors to into production of rice. But only nominal wage rate of labor increases and real wage decreases due to rise in price of rice relative to price of computer. But it will decrease the nominal wage of labors computer industry and real wage of decreases because price of computer falls relative to price of rises . But rice can be produced with given capital and more labor , then real return in the production of rice increases. And with less labor and same amount of capital for production of computer , their real return of specific capital used in production of computer decreases Increase in production of rice leads to increase in demand for labor . It will shift the labor demand curve to rightward to Ld1 . It will rise the labor wage to W1 and quantity of labor employed to L1 So opening of trade unambiguous effect on the China's mobile factor -labor benefit the the immobile factor - capital specific to China's export commodity -rice and harm the capital specific to China's import competing commodity -computer