. Importing goods produced by low-wage workers abroad decreases the demand for l
ID: 1252135 • Letter: #
Question
. Importing goods produced by low-wage workers abroad decreases the demand for
low-skilled U.S. labor that makes competing goods. Supply and demand analysis
shows that the equilibrium wage rate of low-skilled workers making these
competing goods and services will fall and experience bears this out. However,
dire warnings that sweatshop labor conditions will be imported along with the
foreign goods are unfounded. Suppose an employer in the United States faces
competition from a foreign producer who pays the equivalent of $1 a day. Explain
why, even if there were no minimum wage laws, this employer could not succeed by
lowering the wage rates of his or her U.S. workers to $1 a
day.
Explanation / Answer
People don't work for nothing. If they can paid $1 per hour and still live in the US, they will probably make less than $10 a day. In the US, you can't really survive on that. Plus, it's about opportunity cost. You can't really import those conditions because the opportunity cost of working at this $1 an hour place will be huge and thus no one will work there. Happy workers are important. By paying them more, he is raising the productivity of his workers. He is making their opportunity cost of not working hard very high. Think about it, if you have a great job that pays well and that you like because they treat you well, you will most likely not want to get fired for being lazy. Whereas if you were at a job that you hated and the people there treat you like dirt, you probably won't mind as much if you got fired. Looking at the equilibrium, we see that they will consume 13 shirts at a price of $6. This is the equilibrium at which supply equals demand. With free trade, we now visually draw a line at the price of $4 and see that there will be 8 shirts being produced (where the $4 line intersects supply) By the same method as above, except now we see where the $4 line intersects with the demand, we see that they will consume 18 shirts. Thus, they are importing 10 shirts (they are consuming 18 and producing 8, so 10 must be imported). With a tariff of $1, this raises price to $5 per shirt. Looking at the graph, we see that this will cause production to go up to 11 shirts and consumption to go down to 15 shirts. Thus, we see that they are importing 4 shirts now. If the world price was at $4 and the government had a $1 tariff, then the revenue is simply 4x$1 since they are importing 4 shirts and each shirt gives them $1 of revenue.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.