Reference no: EM132906208

Consider the following model of trade for Vietnam in which only two industries exist: electronic manufacturing and coffee production. There are two factors of production: capital and labor. Assume that the workers in the electronic manufacturing have specific skills that cannot be learned by the workers in the coffee industry. Still, the coffee industry can hire workers from the electronic manufacturing, as the skills needed for coffee production are assumed to be easy to learn. Capital is specific to each industry. Therefore, capital cannot be transferred to another industry.

(a) Assume first that there is no trade taking place with foreign and assume further that the wages in the electronic manufacturing industry and the coffee industry are identical. Graph the situation for Vietnam, showing the country's wage and labor allocation between the two industries. Discuss the graph and its implications for the economy.

(b) Assume now that Vietnam opens up to free trade. Assume further that the world coffee price is lower than the price in Vietnam while the price for electronic manufactured goods is identical in the world to the price in Vietnam. Analyse and discuss the implications for the economy in this case. Use the previous graph or draw a new graph showing the changes that you assume would happen.

(c) In your view, who would benefit and who would be hurt by allowing free trade?