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International Economics: Theory and Policy

Paul R. Krugman, Maurice Obstfeld, Marc Melitz

Chapter 3

Labor Productivity and Comparative Advantage: The Ricardian Model - all with Video Answers

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Chapter Questions

02:05

Problem 1

Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is $3,$ while in banana production it is 2
a. Graph Home's production possibility frontier.
b. What is the opportunity cost of apples in terms of bananas?
c. In the absence of trade, what would the price of apples in terms of bananas be? Why?

Andrew Davis
Andrew Davis
Numerade Educator
03:27

Problem 2

Home is as described in problem 1. There is now also another country, Foreign, with a labor force of $800 .$ Foreign's unit labor requirement in apple production is $5,$ while in banana production it is 1
a. Graph Foreign's production possibility frontier.
b. Construct the world relative supply curve.

Crystal Wang
Crystal Wang
Numerade Educator
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Problem 3

Now suppose world relative demand takes the following form: Demand for apples/demand for bananas $=$ price of bananas/price of apples.
a. Graph the relative demand curve along with the relative supply curve.
b. What is the equilibrium relative price of apples?
c. Describe the pattern of trade.
d. Show that both Home and Foreign gain from trade.

Rashmi Sinha
Rashmi Sinha
Numerade Educator
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Problem 4

Suppose that instead of 1,200 workers, Home has 2,400 . Find the equilibrium relative price. What can you say about the efficiency of world production and the division of the gains from trade between Home and Foreign in this case?

Rashmi Sinha
Rashmi Sinha
Numerade Educator
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Problem 5

Suppose that Home has 2,400 workers, but they are only half as productive in both industries as we have been assuming. Construct the world relative supply curve and determine the equilibrium relative price. How do the gains from trade compare with those in the case described in problem $4 ?$

Rashmi Sinha
Rashmi Sinha
Numerade Educator
00:49

Problem 6

"Chinese workers earn only $\$ .75$ an hour; if we allow China to export as much as it likes, our workers will be forced down to the same level. You can't import a $\$ 10$ shirt without importing the $\$ .75$ wage that goes with it." Discuss.

Jennifer Stoner
Jennifer Stoner
Numerade Educator
00:54

Problem 7

Japanese labor productivity is roughly the same as that of the United States in the manufacturing sector (higher in some industries, lower in others), while the United States is still considerably more productive in the service sector. But most services are nontraded. Some analysts have argued that this poses a problem for the United States, because our comparative advantage lies in things we cannot sell on world markets. What is wrong with this argument?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
00:37

Problem 8

Anyone who has visited Japan knows it is an incredibly expensive place; although Japanese workers earn about the same as their U.S. counterparts, the purchasing power of their incomes is about one-third less. Extend your discussion from question 7 to explain this observation. (Hint: Think about wages and the implied prices of nontraded goods.

Jennifer Stoner
Jennifer Stoner
Numerade Educator
00:42

Problem 9

How does the fact that many goods are nontraded affect the extent of possible gains from trade?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:04

Problem 10

We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods, and that each country has only one factor of production, labor. What could we say about the pattern of production and trade in this case? (Hint: Try constructing the world relative supply curve.)

Jennifer Stoner
Jennifer Stoner
Numerade Educator