Question

Consider two countries: Albania, relatively abundant in low-skill labour, and Switzerland, relatively abundant in high-skill labour. Assume high- and low-skill labour are the only factors used in the production of the only two existing goods, and that neither type of labour are allowed to move across countries. Suppose that, initially, Albania is closed to trade. If later Albania joins the EU and hence the free trade agreement (FTA) with Switzerland (with no labour mobility), then:

a. low-skill workers would benefit from this only in Switzerland and lose in Albania
b. low-skill workers would benefit from this in both countries
c. high-skill workers would benefit from this in both countries
d. high-skill workers would benefit from this only in Switzerland and lose in Albania

Answer 1

Both countries' low-skill workers would benefit from Albania joining the EU and the free trade agreement (FTA) with Switzerland.

Step-by-step explanation:

When Albania joins the EU and the free trade agreement (FTA) with Switzerland, low-skill workers in both countries would benefit from this. Low-skill workers in Switzerland would have access to the relatively abundant low-skill labor in Albania, which could lead to increased production and lower prices. In Albania, joining the FTA would provide opportunities for low-skill workers to participate in international trade and potentially benefit from increased demand for their skills.

The impact of a free trade agreement on low-skilled and high-skilled workers in Albania and Switzerland would depend on their respective labor market flexibilities. High-skill workers in both countries might benefit due to more demand for their skills, while the effect on low-skill workers would vary based on labor market dynamics and competition pressures.

The question relates to the impact of free trade on labor markets, particularly focusing on low-skilled and high-skilled workers in Albania and Switzerland. According to the information provided, the U.S. and U.K. have flexible labor markets, which help mitigate the impact of trade on low-wage workers. When applying this understanding to the context of Albania and Switzerland, one might infer that the benefits for workers would depend on the flexibility of the labor market in these two countries. If Albania's labor market is less flexible compared to Switzerland, opening up to the free trade agreement (FTA) may lead to different dynamics for low-skilled and high-skilled workers.

In the case of Switzerland, which is abundant in high-skill labour, the high-skilled workers would likely benefit from having access to more markets and therefore more demand for their skills. The situation may be different for low-skilled workers in Albania, who could potentially face increased competition from Swiss products, which might negatively affect their wages and employment.

From the context of globalization's impact on the U.S., where intra-industry trade and labor market flexibility have helped to cushion the impact on low-income workers, one can speculate that similar effects might be observed if the labor markets in Albania and Switzerland are also flexible. The impact on low-skill and high-skill workers would thus point towards the option that high-skill workers would benefit from this in both countries, option c.