Suppose Korea exports skilled labor-intensive goods like construction equipment to the rest of the world and imports clothing, an unskilled labor-intensive good. Both the goods use skilled labor and unskilled labor as their only inputs. Recently the skilled labor endowment of Korea has increased substantially, but the size of the unskilled labor force has remained unchanged. a. What is the effect of the change in endowment on the shape and position of the production-possibility curve of Korea? Illustrate your answer with the help of a suitable diagram.b. What is the effect of the change in factor endowment on the actual production quantities of the two goods in Korea, assuming the product price ratio remains unchanged in the international market? Explain and illustrate graphically.c.

Question

Assuming the product prices are unchanged, what is the effect of the change in factor endowment on Korea's willingness to trade? Explain, using your diagram.

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE:

a. The increase in Korea's endowment of skilled labor leads to an unbalanced growth biased toward the production of construction equipment.


 
In the figure above, we see an expansion in the production-possibility curve biased toward the production of construction equipment, which is skilled labor-intensive.

b. The unbalanced growth leads to an increased production of construction equipment and a decreased production of clothing, as illustrated in the figure above. In the figure, S1 is the initial production point. S2 is the final production point. If the relative price remains unchanged, the initial equilibrium production point S1 shifts to S2 after the expansion in the endowment of skilled labor. As the production shifts from S1 to S2, the output of construction equipment increases and the output of clothing declines.

c. The result is an increased willingness to trade for Korea. The initial consumption point is C1, and the final consumption point is C2. The quantities consumed of both goods increases. If product prices are unchanged, the quantity of clothing imports increases, because the domestic quantity consumed increases and domestic quantity produced decreases. Korea wants to import more clothing and to export more construction equipment.