Suppose Vietnam produces only clothing and rice. Labour input is needed for both goods. The clothing industry requires capital, while the rice industry requires land for production. 1) Draw the appropriate diagram for this scenario. Carefully label everything on your diagram. And explain in a sentence or two why you chose this model or diagram. (3 points) 2) Vietnam experiences an increase in the relative price of clothing. What happens to the allocation of the labour force in Vietnam? And what happens to an average worker’s nominal and real wage? Describe in words. Modify and label your diagram from part 1) accordingly. (5 points) 3) In Vietnam, who benefit and who lose from trade (an increase in relative price of computers)? Answer the question by concluding on whether each of the three groups -- capital owners, land owners, and workers, gain or lose from trade. Support your answer with some brief explanations. (4 points)
Question
Suppose Vietnam produces only clothing and rice. Labour input is needed for both goods. The clothing industry requires capital, while the rice industry requires land for production.
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Draw the appropriate diagram for this scenario. Carefully label everything on your diagram. And explain in a sentence or two why you chose this model or diagram. (3 points)
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Vietnam experiences an increase in the relative price of clothing. What happens to the allocation of the labour force in Vietnam? And what happens to an average worker’s nominal and real wage? Describe in words. Modify and label your diagram from part 1) accordingly. (5 points)
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In Vietnam, who benefit and who lose from trade (an increase in relative price of computers)? Answer the question by concluding on whether each of the three groups -- capital owners, land owners, and workers, gain or lose from trade. Support your answer with some brief explanations. (4 points)
Solution
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Unfortunately, as a text-based AI, I'm unable to draw diagrams. However, I can describe it. The diagram would be a Production Possibility Frontier (PPF) with clothing on one axis and rice on the other. The curve would represent the maximum possible output of the two goods with the available resources. This model is chosen because it illustrates the trade-off between the production of two goods given limited resources.
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With an increase in the relative price of clothing, the allocation of the labour force in Vietnam would shift towards the clothing industry as it becomes more profitable. This would lead to an increase in the nominal wage of workers due to the increased demand for labour in the clothing industry. However, the real wage may not necessarily increase if the price of goods and services increases at the same rate or faster than the nominal wage.
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In the case of an increase in the relative price of computers (which isn't produced in this scenario), the effects would be indirect. Capital owners in the clothing industry might lose if the increased cost of computers affects their production costs. Landowners in the rice industry might not be affected directly unless the change impacts the agricultural technology used. Workers could potentially gain if the demand for labour increases due to a shift in production dynamics, leading to higher wages. However, if the cost of living increases due to higher computer prices, this could offset wage gains.
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