Question

One of your relatives suggests to you that our country should stop trading with other countries because imports take away jobs and lower our national well-being. How would you try to convince him that this is probably not the right way to look at international trade and its effects on the country?

AND

Consider our Standard model of the economy, with two goods (wheat and cloth) and two factors (land and labor). A decrease now occurs in the price of wheat. What are the short-run and long-run effects on the earnings of each of the following: Labor employed in the wheat industry? Labor in the cloth industry? Land used in the wheat industry? Land in the cloth industry? Explain why in each case.

Answer 1

Reducing imports for the fearing of job losses is a narrow approach to look at International Trade. It can have following negative consequences:

1. Retaliatory measures by Trade partners
2. Current Account Surplus- causing appreciation of currency, thus also reducing competitiveness of exports
3. Causing production of import substitutes (inefficient products) in the Home country- indicating a shift towards inefficient uitlisation of resources.

If Price of Wheat decreases-

1. Labour employed in the Wheat sector would start to receive lower real wages, thus would tend to move towards higher wages in the Cloth industry

2. Amount of Labour in the Cloth industry would increase due to migration of labour from Wheat industry. This continues until an equilibrium is attained such that Pw/Pc = Nw/Nc

Hope it helps!