Question

6a.Assume that the United States is capital abundant, Vietnam is labor abundant, the computer industry is capital intensive and the soccer ball industry is labor intensive.

Before trade:

(L/K)us     _______  (L/K)vietnam

(w/r)us _________(w/r)vietnam

(Psoccerballs/Pcomputer)us ___________(Psoccerballs/Pcomputer)vietnam

Trade opensUS exports ___________ Vietnam exports ___________

Compared to pre trade prices, sign the following for each product group in each country!

Psoccerballs in the US                                                                            Pcomputers in the US

Psoccerballs in Vietnam                                                                       Pcomputers in Vietnam

Next assuming that Labor is mobile between the two industries within each country, but capital is immobile in the short run, how is the purchasing price of each group affected relative to each product that they buy! BOX!

8. Show your workings clearly on next page!

Suppose Px = 60 w + 40 r and Py = 75w + 25r (where the numbers indicate how much per unit labor and per unit capital are needed in producing each good). If Px = Py = 120, solve the simultaneous equations to get w (wages) and r (rental) values! Next if Px = 120 and Py = 200, assuming everything else unchanged, solve the simultaneous equations to get w and r values! By what percentage have wages changed?  By what percentage have rental rates changed? Is product Y labor or capital intensive? Why or why not?  (attach sheet J

Answer 1

6a) L/K_US < L/K_Vietnam (Since Vietnam is labor abundant)

w/r_us > w/r_Vietnam (Since the supply of labour is lesser in US, the labor will be more expensive, hence the wages(w) will be more)

(P_soccerball/P_computer)_{US >} (P_soccerball/P_computer)_Vietnam (In US, manufacturing computers will be relatively cheaper than soccer-balls, since computers are capital intensive and US is a capital intensive nation)

Trade opens; US exports computers and Vietnam exports soccer-balls.