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