Question

Suppose that the US produces two goods, X and Y, with capital and labor. The US is relatively abundant in capital, and X is relatively capital-intensive. In the short-run, neither capital nor labor can move between the X and Y industries. In the medium-run, labor is mobile but capital is specific to each industry. In the long run, both capital and labor are mobile. If the US decides to withdraw from its free trade agreements and impose much higher tariffs, what happens to real incomes in the U.S.? Who wins and who loses in the short run? Who wins and who loses in the medium run? Who wins and who loses in the long run?

Answer 1

U.S. produces two goods X and Y ,with capital and labor. U.S. is relatively abundant in capital and X is relatively capital intensive commodity .That means Y is labour intensive commodity. In short run, neither capital nor labor can move between the X and Y industries. In short run capital is used to produce commodity X and labor is used to produce commodity Y. If the U.S. decides to withdraw from its free trade agreements and impose much higher tariff on import of commodity Y. During free trade,, U.S. will focus on production and export of commodity X and demand for capita and real income of capital will be high. But after imposing higher tariff , U.S. will focus on producing commodity Y then demand for labor will be high and it increases real income of labours. X industry losses and Y industry wins In medium run, labour is mobile but capital is specific to each industry. If U.S. imposes tariff on importing commodity, U.S. will focus on labour intensive commodity Y , demand for labour will be high , It will increases nominal wages of labours .So X industry will transfer labours to the production of commodity Y. It will increase the Px/Py. It will reduce real wage of labors, But commodity Y can be produced with given K and more labours.So real return in the production of commodity Y increases. Y industry wins and X industry losses. In long run , both capital and labor are mobile. Imposition of tariff leads U.S. to focus on production of imported commodity Y. It will increase the demand for labor and capital to produce commodity Y. Because U.S. is capital abundant nation. It will increase the real income of both capital and labours. As a result , real return of Y industry will increase and X industry losses