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There are three countries – the U.S, Germany and China. Each economy produces two goods, tradables...

There are three countries – the U.S, Germany and China. Each economy produces two goods, tradables and nontradables. Each country has one hundred workers. You should assume that the price of tradables is one.

The number of workers in each country required to produce one unit of output of tradables and nontradables is given below:

                                          Nontraded      Traded

U.S                                     2.0                   1.0

Germany                           1.0                   1.0

China                                 8.0                   2.0

Answer the following questions:

  1. What is the wage rate in the China?

  1. What is the nontradable price level in the US?

Suppose that the productivity of labor increases in China. It now takes four workers to produce one unit of nontradables while the productivity of workers in tradables for China stays the same.

  1. What is the wage rate in China now?

  1. What is the price nontradables in China now?
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Homework Answers

Answer #1

It is assumed that non-tradables price is 50% of tradable price.

Wage rate in the China

Non-tradables wages = (100*8/10)*0.5

=40

Tradable wages = (100*2/10)*1

= 20

Total wage rate in China is 0.60

Computation of non-tradables in US

= (100*2/3)*0.5

=33

If number of workers are 4 to produce one unit of non-tradables, the production of tradable unitls will be increased by 14 units.

Now the wage rate in China is

=((100*4/6)*.5 + (100*2/6)*1)/100

=(34+34)/100

=68/100

= 0.68

Price for non-tradables in China is 34

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