Question

10. Consider that there are two goods (handmade rugs and robots) that are manufactured in two countries (India and Japan). a) Which country do you expect to be relatively labor abundant and which do you expect to be relatively capital abundant? b) Which industry do you expect to be capital intensive and which is labor intensive? c) Which country will export rugs? Robots? d) What happens to the wages of Indian rug weavers when trade begins? e) What happens to the price of robots in India when trade begins?

Answer 1

Answer

10. a) India, I expect to be relatively labor abundant; and Japan, I expect to be relatively capital abundant.

In 2019, Indian ranks 2 in world population, whereas Japan ranks 11 in world population. In India, the endowment of labor is relatively larger than any other factors. In japan the endowment of capital is relatively larger than any other factors.

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10. b) The robots industry is capital intensive industry. The handmade rugs industry is labor intensive industry.

The capital intensive industry requires more investment and machinery for production of goods. So the amount of capital per unit of output is more than the amount of labor. In the labor intensive industry, the amount of labor required per unit of output is more than the amount of capital.

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10. c) India will export rugs. Japan will export robots.

India is labor abundant country, and handmade rugs industry is labor-intensive industry. So, India will produce handmade rugs, and will export it. India has comparative advantage in the production of handmade rugs.

Japan is capital abundant country, and robots industry is capital intensive industry. So Japan will produce robots, and will export it. Japan has comparative advantage in the production of robots.

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10. d) When trade begins, the wages of Indian rug weavers will increase. The trade will increase the demand for Indian handmade rugs. As a result the demand for Indian rug weavers will increase. So the price of rug weavers, i.e., the wage rate of rug weavers will increase.

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10. e) When trade begins, the price of robots in India will fall. The cost of production of robots in India is too high, as it is capital intensive good. When trade begins between India, and Japan, India will import robots from japan, because in world market, the price of robot is lower than it is in India. India will be able to import robots at cheaper rate, when trade begins.So the price of robots in India will fall with the advantage of free trade.

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