Question

In Chapter 5, we learned that the owners of a country’s abundant factors gain from trade while the owners of scarce factors lose. Given this theory, U.S. workers can lose from the growth of Chinese industry since the U.S. is capital abundant and labor scarce compared to China. Some say that based on the theory presented in Chapter 7, China becoming the world’s manufacturer can be beneficial to the U.S. because U.S. consumers can purchase products more cheaply. Please elaborate on these two arguments using what we have learned in Chapters 5 and 7. How can you reconcile them?

International Economics, Theory and Policy, Global Edition by Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz

Answer 1

China becoming woelds leading manufacturer is an advantage and disadvantage both as it helps procure goods at cheaper rates which helps savings and wider availability and accessibility of goods. However it makes US dependent due to comparative advantage by Chjna and thus imports surge causing unemployment and job losses in US which ultimately leads subdued economic growth. Thus a balance between exports and imports is needed to reconcile and improve the comparative advantage in US through tax cuts and government support.

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