Question 1
a) Assume that Vietnam is labor-abundant relative to the U.S. and the two countries decide to eliminate all trade barriers from a very high level. Shoes are labor-intensive and computers are capital-intensive. Using a graph of the production possibilities frontier, show the effect of opening to trade on production and consumption in Vietnam. What will happen to the relative price of the labor-intensive good? (put computers on the horizontal axis). Label exports and imports.
b) Using a diagram of relative labor demand and supply, explain what will happen with employment, capital, real wages and rental rates in both sectors.
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Question 2
Thailand can produce either LCD Televisions or CAR PARTS. The economy-wide relative demand for labor and the economy-wide relative supply of labor are illustrated below. For the moment, assume that Thailand is self-sufficient – not trading with any other countries.
Economy-wide relative demand for labor
a) Referring to your diagram, describe the equilibrium wage rental ratio (W/R) for Thailand when it is not trading.
b) Assume LCD Television production is capital-intense relative to the production of Car Parts. Add markings on your diagram which allow you to illustrate the labor to capital ratio (Lc/Kc) which reflects the production technique selected by producers in the Car Parts industry.
c) Suppose Thailand exports Car Parts when it starts to trade. Modify the following diagram to reflect this change, and explain how the relative rewards for labor to capital will change.
Economy-wide relative demand for labor
Question 3
Assume Ladder production is capital-intense, and Fabric production is labor-intensive. Based on following diagrams, which country is capital abundant?
PERU Q* Fabrics COLOMBIA
Q-Ladders Q* Ladders
Question 4
Suppose when Russia opens to trade it imports automobiles, a capital-intensive good.
a) According to the Heckscher-Ohlin theorem, is Russia a capital or labor abundant country?
b) What is the impact of opening trade on the real wage in Russia?
c) What is the impact of opening trade on the real rental on capital?
d) Which group (capital owner or labor) would support policies to limit free trade?
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