The United States and China can produce TVs at $200 and 2000 yuan each. One day of labor is needed to produce a TV in the United States and 10 days of labor are needed to produce a TV in China. Each country also produces the nontraded good, car washing. In each country, one car can be washed in one day. The exchange rate is 10 yuan = $1. If trade costs are zero, what is the Chinese daily wage?

Question

Quizplus · Accepted Answer

The Chinese daily wage can be determined by comparing the productivity of labor in both countries in terms of a common product, here TVs, and adjusting for the exchange rate. In the US, it takes 1 day to produce a TV that sells for $200. In China, it takes 10 days to produce a TV that sells for 2000 yuan. Given the exchange rate of 10 yuan = $1, the price of a TV in China in US dollars is $200 (2000 yuan / 10 yuan per $1). Since it takes 10 days to produce a TV in China, and the value of the output is equivalent to the US value of $200, the daily wage in China, if labor productivity in both countries is fully reflected in wages and there are no trade costs, would be the value of one day's labor towards producing a TV. Therefore, the daily wage in China is 2000 yuan / 10 days = 200 yuan.

The United States and China Can Produce TVs at $200