Mike Harris in a research paper on free trade between high-wage countries and low-wage countries concluded free trade between low-wage countries such as China, India, and Pakistan and high-wage countries such as the U.S., Japan, and Germany would depress wages in high-wage countries. His conclusion was based on the following: Point 1: U.S., Japanese, and German workers are unable to compete with cheap foreign labor from countries such as China, India, and Pakistan. Point 2: U.S., Japanese, and German workers are less productive than workers in China, Pakistan, and India. Point 3: Free-trade between high-wage countries and low-wage countries will reduce the consumption possibilities of people in high-wage countries. Are Points 1, 2, and 3, as raised by Harris correct? Point 1 Point 2 Point 3 A) Incorrect Incorrect Incorrect B) Incorrect Correct Correct C) Correct Correct Incorrect D) Correct Incorrect Correct
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I know the answer is A, 'coz 2 & 3 are definately incorrect. But I had my doubts about statement 1. The only way they can compete is by moving higher into the value chain i.e, a toothpick maker in US can probably kiss his job goodbye. He can enroll into CFA and maybe compete then… Is this the point that they are trying to convey?..Otherwise he will just be a statistic and ironically he will not even be counted within the unemployment rate 'coz this is structural unemployment.
dehlirocks I agree that the first point is the most arguable. but is related to point no2, it is assumed that high wage countries are countries that have a better productivity, workers are more qualified, as employers see that as an investment. cheap labour comes and goes and has a higher turnover
Answer: A) Points 1 and 3 are incorrect because due to the law of comparative advantage which states in part that when two countries trade products in which they both have a comparative advantage both countries will be better off because they will both be able to consume outside their respective production possibility frontiers. Point 2 is incorrect because as labor becomes more expensive as in industrialized countries, capital (technology) is substituted for labor increasing the productivity of each worker.