Question

Belgium is relatively well-endowed with skilled workers compared to China, which is relatively well-endowed with unskilled workers. Assume that the production of pharmaceutical products intensively uses skilled workers while toys intensively use unskilled workers.

a.      Which country would you expect to have a higher relative wage in skilled labor with no trade?

b. Which country has the higher relative price of pharmaceutical products prior to trading?

3. Under free trade, which country experiences an increase in the relative wage of skilled workers? Explain

Answer 1

Belgium is relatively well endowed with skilled workers as compared to China, which is relatively well -endowed with unskilled workers. Production of pharmaceutical products intensively uses skilled workers while toys intensively use unskilled workers. a. Belgium has well endowed skilled workers , so it focus on the production of pharmaceutical products . China has well endowed unskilled workers and it focus the production of toys But, under auturky, (no trade ) the relative wage of skilled labors is low in Belgium and skilled labors have high relative wage in China. Because in the absence of trade Belgium not only focuses on the production of pharmaceutical products ,but it will produces almost all products that the nation need. Therefore the demand for skilled labor is low and thereby wage of labors relatively low in Belgium as compared to China. But China endowed with unskilled workers has higher demand for skilled workers, because number of skilled are less available in China. Higher demand for skilled increases their wage into higher level. b. In the absence of trade , relatively lower price for pharmaceutical products in Belgium as compared to China. Because Belgium has well endowed with skilled labor, so they can produce pharmaceutical products whatever they required, so demand for these products will be low .Thereby price of pharmaceutical products become s relatively low in Belgium. But China endowed with unskilled labor, so it can 't able to produce pharmaceutical products whatever they required. Therefore demand for there products will be high in China. Thereby it results high relative price of pharmaceutical products in China c. Under free trade Belgium begin to focus on production and export of Pharmaceutical products .It will increase the demand for skilled labors in Belgium. Higher demand for skilled labors increases the relative wage of skilled labors. China focus on the production and export of toys which requires unskilled workers. So demand for skilled labors will be low. Thereby it reduce the relative wage of skilled labors in China