With identical wages in both industries, in equilibrium, both countries maximize profit at the same time and workers are fully employed (suranovic 2010)

Subject code

ECON1269

Subject name

International Trade

Campus
Assessment name
Lecturer
Student name

Saigon South
Effects of Trade
Daniel Borer
Tran Minh -s3749819
Bui Dac Loc – s3754449
Vu Hien Long – s3845572
Vuong Bao – s3878354

Word count

1544 excluding graphs and tables

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QUESTION 1:

a) The specific factor model describes an economy situation where there are only two

industries using a mixed of mobile and immobile (specific) factors to produce their goods in a
perfectly competitive market (Suranovic 2010). Since our model assumptions match with these
criteria, this model is applicable.
In such market, each industry maximizes their profit by hiring until labours’ wage equals to the
maginal value of product labour (MVPL) (Pullen 2010), as wages lower than MVPL means there


is still room for expansion and higher than MVPL will incur loss for the industry (Suranovic
2010).
In the economy both industries choose labor input to maximize the profit meaning:
WE = MVPLE and WC = MVPLC
Labor either work for electronic or coffee industry hence: LE + LC = L
With identical wages in both industries, in equilibrium, both countries maximize profit at the
same time and workers are fully employed (Suranovic 2010) (point A in figure 1.1)

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Figure 1.1: Vietname labour’s wage and allocation between two industries in autarky
b) As these are perfectly competitive markets, in free trade, Vietnam coffee capitalist are
forced to lower their price to match with the world or they will lose all the customer to the
supplier with lower price (Hubbard et al. 2017). Since our model assumes labor and capital of
coffee industry are fixed, the drop in coffee price would lead to a decrease in the value marginal
product of labor (McLaren 2012) shifting the MVPL curve down (MVPL C1 ->MVPLC2, figure
1.2). This means with the same amount of labour, firms generate lower profit compared to before
and profit will become negative (Suranovic 2010). To cut losses, firms only options are to lay off
workers or to pay less for workers and capital owners. Nevertheless, because coffee labour
cannot move to the electronic industry, they will either have to accept the lower wages or be
unemployed. Assuming full employment prevails, the industry factors (L, K) price will decrease
till the industry losses are eliminated (Suranovic 2010) (point B figure 1.2). On the other hand,

with the same product price, MVPL curve for electronic industry stays the same. Moreover, the
number of electronic labour still remain the same as electronic workers will not move to the
coffee industry working at a lower wage nor coffee labour can move to their industry. As a result
electronic industry is not affected.


Figure 1.2: Vietnam labour’s wage and allocation between two industry in free trade
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c) Considering the coffee workers’ budget line, as their wage decrease while the price of
electronic products remain unchanged, they can buy less electronic products compared to before.
On the other hand, the proportion of price decrease in coffee is the same with the proportion
decrease in wage (A ->B figure 1.2)(McLaren 2012). So they can still buy the same amount of
coffee.

Figure 1.3: Effect of trade on coffee workers’ budget line

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According to McLaren (2012), the capitalists’ income will change at the same rate with
both the MVPL and the wages of workers if those two shift with the same amount. Hence the
changes in coffee owners’ income is the same with changes in price of coffee. This means they
can buy the same amount of coffee while buyless electronic products compared to before (figure
1.4)


Figure 1.4: Effect of trade on coffee capitalists’ budget

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In contrast, the nominal wage of electronic workers and electronics products is not
affected so budget line intercept electronic the same point as before (W E/PE). However, the price
of coffee after trade has decrease, thus increase the real income of the workers since now they
can buy more coffee.

Figure 1.5: Effect of trade on electronic workers


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Similarly, the eletronic capitalists experienced the same increase in budget as their
worker. They can buy the same amount of electronic products while buying more coffee than
before as their real income has risen. (Figure 1.6)

Figure 1.6: Effect of trade on electronic capitalist
In summary, both the owners and workers of coffee industry are hurt by free trade while
owners and workers of electronic industry benefit from the trade.

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QUESTION 2:

a)

Figure 2.1: Main Exports of Indonesia in 2019.
Data adapted from OEC.
The Republic of Indonesia is well-known for its massive production and reserves of coal
for exports around the world. Coal Products in general, and Coal Briquettes in particular, hence,
accounted for the largest proportion of the country’s exports (around 10% of total). In figure 2.1,
the energy products, such as Palm Oil and Petrolerum Gas, respectively take 7% and 4% of total
exports, proving that trading energy comodities is the major strategy of Indonesia in exchange
for essentail imports to enhance domestic manufacturing activities.

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Figure 2.2: Main Imports of Indonesia in 2019.
Data adapted from OEC.
Similar to exports, after rejoining OPEC, Indonesia mainly focused on importing energy
commodities, as its domestic demand for the bundle of products is steadily climbing, which was
reported to exceed its production and become net petroleum importer (Yo & Dunn 2015). Figure
2.2 agreed that Refined Petroleum held for 5% of imports, followed by the Crude Petroleum and
Petroleum Gas with 2% and 1%, respectively.


Table 2.1: Main Exporting Partner of Indonesia in 2019.
Data adapted from OEC.

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