Suppose the US and China are both under autarky, and each have a cell phone indu

Question

Suppose the US and China are both under autarky, and each have a cell phone industry which engages domestically in all the aspects of cell phone production: R&D;, component production, assembly, and sales/marketing. Suppose China is abundant in low skilled labor. When the countries open to free trade, they decide China will handle all assembly, which is the most low skilled labor intensive task, and the US will handle all other aspects of cell phone production. What is the impact on the wage for low skilled labor in each country? Why? Suppose improvements in transportation technology lower the costs of trade between the US and China. Now, the countries decide that China will also handle component production, the second most low skilled labor intensive task, in addition to assembly. The US still handles R&D; and sales/marketing. How does this impact the wage to low skilled labor in each country, as compared with part a.? Why?

Explanation / Answer

8 A When China's low skilled labour is used to produce more of cellphones due to trade it will increase their demand and with low wages more will be hired. In USA the demand for low/high skilled labour will go down and there wages will be equated at par to the Chiina's low skilled labour.

b) it will decrease the wages further to lower for USA skilled labour in comparson to the Chia's labur & China will employ more of low skilled labour train them & provide them wages. It will use its labor to its optimum level to increase production and then wages will slightly increase.

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