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Problem Set 7: Comparative and Absolute Advantage in International Trade, Assignments of Microeconomics

A series of problems related to comparative and absolute advantage in international trade. Students are asked to determine which country has absolute advantage or comparative advantage in the production of certain goods based on labor productivity data and production possibilities curves. They are also asked to determine the international terms of trade when trade is permitted.

Typology: Assignments

Pre 2010

Uploaded on 08/16/2009

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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.
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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. Japan 1.2. 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.
  1. Suppose that Cuba and Mexico each produce sugar and corn with labor only. Each country’s labor productivity is indicated in the table below: Technology Labor Productivity: Output per unit of labor Tons of Sugar Tons of Corn CUBA 10 4 MEXICO 20 10 a. Which country has absolute advantage in the production of sugar? Of corn? Explain. The technology above implies the following production possibilities curves ( PPC’s ) for each country. CUBA’s PPC MEXICO’s PPC Tons of Sugar Tons of Corn Tons of Sugar Tons of Corn 0 8 0 20 10 4 20 10 20 0 40 0 b. i. In Cuba , the opportunity cost of one ton of corn is ________ tons of sugar. ii. In Mexico , the opportunity cost of one ton of corn is ________ tons of sugar. c. Which country has comparative advantage in the production of sugar? Of corn? Explain. d. If trade is permitted: i. Cuba would export ___________ and import __________. ii. Mexico would export ___________ and import __________. iii. Which of the following could be the international terms of trade : One ton of corn for 2.25 tons of sugar -or- One ton of corn for 3 tons of sugar? Explain.
  2. In one hour of work, Ricky Ricardo can iron 3 baskets of clothes or rake 3 bushels of leaves. In one hour, his wife Lucy can iron 3 baskets of clothes or rake 6 baskets of leaves. a. Which member of the Ricardo household has absolute advantage in ironing? In raking leaves? b. Using the principle of comparative advantage , who in the Ricardo household should iron clothes and who should rake leaves? Explain.
  1. a. Mexico has absolute advantage in both goods. b. i. Cuba: Opportunity cost of 1 ton of corn = 2.5 tons of sugar. ii. Mexico: Opportunity cost of 1 ton of corn = 2 tons of sugar. c. Based on opportunity costs, Cuba has comparative advantage in sugar and Mexico has comparative advantage in corn. d. Cuba exports sugar, the good in which it has comparative advantage, and imports corn. Mexico does the opposite. The international terms of trade could be one ton of corn for 2.25 tons of sugar.
  2. a. Neither has absolute advantage in ironing (labor productivity is the same : 3 baskets of clothes per hour). Lucy has absolute advantage in raking leaves. b. Ricky : In one hour, he can iron 3 basket of clothes, but will give up raking 3 bushels of leaves. Thus, opportunity cost of 1 basket of clothes ironed = 1 bushes of leaves raked. Lucy: In one hour, she can iron 3 baskets of clothes, but will give up raking 6 bushels of leaves raked. Thus, opportunity cost of 1 basket of clothes ironed = 2 baskets of leaves raked. Ricky’s opportunity cost of ironing is lower and thus Ricky has comparative advantage in ironing and should do the ironing. Lucy’s opportunity cost of raking leaves is lower ( you figure it out) and thus Lucy has comparative advantage in raking leaves and should rake the leaves.
  3. a. Y Y 25 25 12.5 12. 0 25 50 X 0 10 20 X COUNTRY A COUNTRY B b. Country A: Opportunity cost of 1 X = 0.5Y; opportunity cost of 1 Y = 2X Country B: Opportunity cost of 1 X = 1.25Y; opp. cost of 1 Y = 0.8X  Country A , with lower opp. cost, has comp. adv. in good X. Country B has comp. adv. in good Y.

c. i. Each country will specialize in the production of the good for which it has comparative advantage. Y Y Production with free trade Prod. 25 25 12.5 12.5 A Prod. 0 25 50 X 10 20 X COUNTRY A COUNTRY B ii. The international terms of trade are 1 X for 1 Y. Each country will export the good in which it has comparative advantage. Y Y BP 25 25 12.5 Cons. 12.5 Cons. BP 0 25 37.5 50 X 10 12.5 20 X COUNTRY A COUNTRY B Each country consumes outside its production possibilities curve after the trade is complete, and therefore is better off with trade. .