Question

Suppose that India produces jewelry & pharmaceuticals with the following fixed factor requirements:

                                                            Machine-Hours                 Worker-Hours

                                                            per unit                                  per unit

Jewelry                                             3                                           6

Pharmaceuticals                               10                                        4

India is thinking of signing a free-trade agreement (FTA) with Australia. Prior to joining the FTA, the average price of jewelry is 15 rupees & the average price of pharmaceuticals is 42 rupees. After the FTA is signed, the prices will be 21 rupees (jewelry) & 30 rupees (pharmaceuticals).

Calculate the Indian K/L ratios for jewelry & pharmaceuticals. Looking at the the pre- & post-FTA relative prices, can you tell if India is more or less labor-abundant than Australia? Explain.

Answer 1

Talver Here given that India Boduces Jewelry and Pharmaceutical with the help of stred factor requirements machine and worker According to given table workey - HOUT per unit Jewelry 3 x = 3 = 015 6, 12 = -2 Pharmaceuticalst 10= 10235 | 9 of Machin - home Per Unit Now, each unit Produced of Jewelry, the 3 hour Machin or 6 hour worker required. And also each or per unit produced Pharmaceuticals, required Machin and worker 10 and 4 respectively. Again, we find K/L ratio for a Jewelry, K - 2 = 0.5 - Pharmaceuticals, telo 32.5 - Tos care of Jewelry and Pharmaceuticals, India is more cabital - a brandant for the productia of Jewelry and more Labor - abundant for the induction of Pharmaceuticals AT

Now, Pre-roining the FTA average Price s Jewelry is 15 rupees and Pharmaceutics is 42 rupees. and post - Joining the ITA average Price is 21 rupees and or rrespectively, elli Average price. Pre- joining Post-Joining 15 / 21 IPharmaceuticals 42 al I 30 no Jewelry - 1.4 (*) Pre-joining ETA TOT of India - Term of trade (TOT) for Jewelry - Pre-Joining Post Joining - 15 = 0.71 21 - TOT for Pharma reuticals. = 42 & Post - Joining FTA TOT of India I TOT for Jewelry = 21 = 1.4 a vg Pharmaceuticals 30 = 0:71. •Pre-Joining FTA India less labour abqudant of Jewelry after post-Joining ITA more labour abundant of Pharmaceuticall, 42