China and Japan have two factors of production, land and labor. Both countries produce two goods, corn, which requires more land, and computers, which requires more labor. Given that
China is abundant in land and Japan is abundant in labor, what will be the effect on the terms of trade an increase in 's labor supply? What will be the welfare effect of a decrease in land used for corn in Japan ? China
Among the two factors of production, land and labour,
has abundance of land, but is short of skilled labour needed for computer manufacture. China on the other hand has abundance of skilled labour but is short of land needed for corn production. This is classic case of Ricardian theory. Japan
It is given that both countries produce corn as well as computers. But production of corn in
Japan must be costlier in Japan than in China and so also the production of computers in . When labour force increases in China , the cost of production of computers comes down further. If free trade being allowed between Japan China and Japan, people in China will opt for purchase of computers from Japan and the Japanese try to buy corn from China as a result of which gradually Japan will be shifting to specializing in production of computers and to production of more corn. China Japan will have comparative advantage in production in computers and in production of corn. They can trade with exchanging both corn and computers which works towards gain for both countries. Since both countries geographically are also close by, the transportation costs are negligible thereby increasing the price competitiveness of the goods. The decrease in land used for corn in China will have adverse impact on the cost of corn production which can increase the price of corn. China
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