The US imports huge amount of goods from China each year. Because the labour cost in China

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Question:

The US imports huge amount of goods from China each year. Because the labour cost in China is much cheaper (3% of US level according 2007 estimate), those imported goods tend to drive down the price of similar products in the US. Let’s assume the US has two sectors: high-tech and low-tech, the latter of which is in direct competition with China.

a) What is the impact of China’s imports on relative wages between the two sectors in the US? Explain within the context of Stolper-Samuelson theorem.

b) If above effect as implied by Stolper-Samuelson theorem persists (because China is such a populous country), what impact would it have on the career choices of US labour force in the future? Imagine you are the parents who will be helping your children choose their college majors and career.

c) Based on your answer in b), how would this new landscape in career choices affect the future growth rate of the US? Is this impact going to be positive or negative? What is your assessment and explain why you think so.

d) Based on your answer in c), how will the wage inequality in the US be further affected? ssentially, this is your prediction of future US inequality, assuming everything else being equal.

e) Now let’s turn to China: What’s the prediction of China’s wage in tradable sectors? Will it rise or fall? What about the wage in non-tradable sectors? Be sure to explain why you think so.