Here’s an example using car manufacturing to illustrate how cheaper imported cars can affect a country’s standard of living, considering factors like productivity, labor market dynamics, and the potential role of tariffs.
Imagine a small country with a workforce of 200,000 people, divided between two sectors:
- Car Manufacturing (Tradable Sector): Workers produce cars that can be sold domestically or imported from abroad.
- Service Sector (Non-Tradable Sector): Workers provide services (e.g., retail, education) consumed only within the country.