Question

We are in two good, two countries, where all of the assumptions of the Heckscher-Ohlin model of trade are satisfied. Suppose that in Japan there are 50 workers and 50 acres of land, while in the US there are 100 workers and 200 acres of land. Suppose furthermore that the two goods, rice, and cloth, are produced using land and labor. Rice is land intensive.

Suppose workers in the US go on strike to protest free trade. why would they do this?

If the US government listens to the strikers and limit trade, is it acting in the best interest of the US? why or why not?

Answer 1

a. Since rice is land intensive product and the United States has comparative advantage in the production of rice being a land intensive product, thus the United States will export rice which is land intensive product and import a labor intensive product from Japan. Thus, production of labor intensive product will reduce in the United States and thus labor demanded will decline and this will result in unemployment in the United States. Thus, the workers in the US will go on strike to protest free trade to save their employment.

b. No, limiting trade is not in the best interest for the United States economy as it will reduce competition in the economy and thus increase prices which will reduce the level of consumer surplus in the economy. Also trade is the engine of growth for an economy and thus restricting trade will reduce the overall level of GDP in the economy and GDP growth rate further in the economy. Thus, if government limits trade, it is not acting in the best interest of the US.