PROBLEM SET 7
Problems for Chapter 20
1. Suppose that Japan and India each produce cloth and automobiles with labor
only. Each country’s labor productivity is indicated in the table below:
Technology
Labor Productivity: Output per unit of labor
Cloth (100 bolts) Automobiles (number)
India .5 .25
Japan 1.2 .8
a. Which country has absolute advantage in the production of cloth? Of
automobiles? Explain.
The technology above implies the following production possibilities curves (PPC’s) for
each country.
INDIA’s PPC JAPAN’s PPC
Cloth (100 bolts)
Automobiles
(number) Cloth (100 bolts)
Automobiles
(number)
0 4 0 8
4 2 6 4
8 0 12 0
b.
i. In Japan, the opportunity cost of 1 automobile is________ units
of cloth.
ii. In India, the opportunity cost of 1 automobile is________ units
of cloth.
c. Which country has comparative advantage in the production of cloth?
Of automobilies? Explain.
d. If trade is permitted:
i. Japan would export ___________ and import __________.
ii. India would export ___________ and import __________.
iii. Which of the following could be the international terms of trade:
One automobile for 1.75 units of cloth
-or-
One automobile for 3 units of cloth?
Explain.
