Question

Assume a two country (home and foreign) and a two good (agricultural good and manufacturing good) model. Suppose that labor (only mobile factor) is used in both the industries, but land is specific to agriculture, and capital is specific to manufacturing. Use the specific factors model to briefly explain the existence of sweatshops in the foreign country that has a comparative advantage in the agricultural good.

Answer 1

Sweatshops are the factories or other workplaces which have manufacturing goods and hire labour at low wages and port working conditions. Given these conditions we can infer the following

Since the foreign country has agriculture comparative advantage , if sweatshops exist there , then the labour would have both agriculture and manufacturing in foreign. But as we know that foreign is land intensive because it has agriculture as its advantage, so it won't be as capable as home to produce capital intensive goods ie manufacturing good and this would lead to less productivity from sweatshirt as compared to home which would be of no use.

Second, wages in sweatshop are less and working conditions are poor so if labour has sweatshops and agriculture, they would prefer agriculture because of better wages and living conditions.

Morever if this happens the resources of foreign would shift to sweatshops as well which would lead to less efficiency in agriculture since the resources are diverted.

Also since home is specialised in production of manufacturing goods, foreign would produce it at high cost than home which would generate less revenue and would be a loss to foreign