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Sem 5 Prep
← Intl TradeThe political economy of protectionism

Formulas for this chapter

Unit labour cost

Unit labour cost = wage per hour / units produced per hour

Whenever a question invokes cheap foreign labour. Compute it for both countries: the high-wage country is the cheaper producer whenever its productivity ratio exceeds its wage ratio.

Wage per hour
Money paid to labour for one hour, in either currency once converted
Units per hour
Output per worker-hour, that is labour productivity

Break-even wage against a foreign rival

Break-even domestic wage = foreign wage x (domestic productivity / foreign productivity)

To find how high a domestic wage can go before the foreign producer becomes cheaper. Below that wage the high-wage country still undersells, which is the quantitative form of the answer to the cheap labour argument.

Foreign wage
Wage per hour abroad
Productivity ratio
Domestic units per hour divided by foreign units per hour

Scientific tariff rate

Scientific tariff % = (domestic price - import price) / import price x 100

The tariff that would equalise the two prices. The denominator is the import price, because an ad valorem duty is charged on the imported good's value. Always follow the number with the conclusion that trade stops.

Domestic price
Price the domestic producer needs
Import price
Landed price of the imported good before duty

Subsidy needed to make entry profitable

Subsidised payoff = unsubsidised payoff + subsidy, so subsidy > |loss| for entry

For a strategic trade policy payoff table. Compare the subsidised entry payoff with the zero payoff from staying out, then check whether the rival's own payoff turns negative and whether it can be subsidised in reply.

Unsubsidised payoff
The firm's profit in the cell where both firms produce
Subsidy
Annual government payment to the firm
Step 2 of 31
The real wordsTheory

Fallacious argument 1: cheap foreign labour

The cheap foreign labour argumentTrade restrictions are needed to protect domestic labour against cheap foreign labour.

It is the most popular argument for protection anywhere, and the deck answers it in two moves.

  • Even if domestic wages are higher than wages abroad, domestic labour costs can still be lower, if the productivity of labour is sufficiently higher domestically
  • And even where foreign labour genuinely is cheaper, mutually beneficial trade can be based on comparative advantage, with the cheap-labour nation specialising in labour-intensive commodities
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