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

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...

Subject code ECON1269

Bui Dac Loc – s3754449

Vu Hien Long – s3845572 Vuong Bao – s3878354

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 = MVPL and W = MVPLE

Labor either work for electronic or coffee industry hence: L + L = LE C

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 ->MVPL , figureC1 C2 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

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 (WE/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

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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

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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