In this chapter, we learned that China is abundant in less-skilled labor. Over time, it has changed

Question:

In this chapter, we learned that China is abundant in less-skilled labor. Over time, it has changed from being scarce in physical capital to being abundant in physical capital, and it has also changed from being scarce in R&D scientists to being abundant in R&D scientists. To relate these changes to our two-good, two-factor model, suppose that labor represents less-skilled labor, which is used intensively in shoes, and capital represents physical capital or human capital (like R&D scientists), which is used intensively in computers. China starts off being abundant in labor and scarce in capital, whereas the United States starts off being scarce in labor and abundant in capital. Therefore, the United States is exporting computers and China is importing computers.

a. Suppose that China accumulates more capital. Show what happens to its production possibility frontier between computers and shoes. Based on this shift, what happens to its no-trade relative price of computers?

b. Treat China as the Foreign country in Figure 4-5, and based on your answer to part (a), show what happens to China’s import demand curve for computers. Therefore, what happens to the equilibrium world relative price of computers with free trade?

c. Based on your answer to part (b), show how this change in the world relative price of computers affects production and consumption in the United States. Determine if utility in the United States goes up or down, and explain why.

d. Instead of China accumulating capital in part (a), suppose that it raises its endowment of less-skilled labor (by moving less-skilled workers from the countryside into manufacturing, for example). Then redo parts (a), (b), and (c), starting with the increase in China’s endowment of labor and no change in its endowment of capital.

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