Solutions: FINA 5500 / Quiz 1 / Spring 2012
Suppose that both US and Japan have 1,000,000 workers that can produce either steel or aluminum, and
their output level is provided in the following table. Currently, both countries allocate 50% of their labor
force to steel and 50% to the aluminum industry. Please answer the next two questions based on this
Steel
Aluminum
Output / worker in Japan
375 lbs
25 lbs
Output / worker in US
300 lbs
30 lbs
1. Using the axis below, draw the production possibility curve for the combined economies (US & Japan)
and label the points on this graph where the combined economies will be without trade and with trade
(i.e., label the coordinates for these two points on both axes.)
Aluminum (in million lbs)
55
With Trade (375, 30)
Without Trade (337.5, 27.5)
Steel (in million lbs)
675
2. Indicate if the following terms of trade are acceptable (A) or unacceptable (U) to Japan and US
Japan
US
1 pound of Aluminum = 16.5 pounds of Steel
U
A
1 pound of Steel = 0.15 pounds of Aluminum
A
U
3. According to the article on Offshoring by Alan Blinder, briefly describe the three Industrial Revolutions
that have transformed the world economy.
i. Jobs moved from agriculture to manufacturing during late 19th through early 20th century.
ii. Jobs moved from manufacturing to service during 1950s through recently.
iii. Jobs in the tradable goods sector (that could be digitally performed without loss of quality) moved
out of the US (outsourced) to other parts. Jobs that remained in the US were mostly in the non-tradable
goods sector (that could not be easily digitally performed without loss of quality). This has been
happening during the current decade.