PROBLEM SET 3
PUGEL 14, “Questions and Problems,” pp. 65-66: #3, 7*.
* Answer in back of textbook
ADDITIONAL PROBLEMS
1.
For each of the following pairs of countries, which country has the largest
absolute endowment of each factor? Which country is relatively capital abundant and
which is relatively labor abundant?
a.
Argentina
Brazil
Capital Endowment
$24,018 billion
$30,476 billion
Labor Endowment
8,496 thousand persons
26,463 thousand persons
b.
United States
Canada
Capital Endowment
$785,933 billion
$76,537 billion
Labor Endowment
76,595 thousand persons
7,232 thousand persons
c.
United States
Mexico
Capital Endowment
$785,933 billion
$21,639 billion
Labor Endowment
76,595 thousand persons
12,844 thousand persons
2
2.
Y
Y
I1
ΔY/ΔX = -1
●A
ΔY/ΔX = -0.5
●B
●A’
I1
I1
Country A
X
ΔY/ΔX = -2
X
Country B
a.
Suppose Country A’s no-trade equilibrium is at point A and Country
B’s no-trade equilibrium is at point B. Which country has comparative advantage in X
and which has comparative advantage in Y?
b.
Ignore part a. Suppose instead that Country A’s no-trade equilibrium
is at point A’ and Country B’s no-trade equilibrium is at point B. Which country has
comparative advantage in X and which has comparative advantage in Y?
c.
What does this tell you about the role of consumers in determining
comparative advantage in the modern/neoclassical trade model?
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3.
Suppose that the countries of Kismet and Shangrila produce only, baubles
and bangles. Equilibrium for both countries with no trade is depicted below.
Bangles
Bangles
ΔBan/ΔBau = -.75
●A
●A
I1
I1
KISMET
a.
Baubles
ΔBan/ΔBau = -3
Baubles
SHANGRILA
Which country has comparative advantage in which good?
b.
Suggest an international terms of trade at which trade will occur and
show graphically how both countries will gain from trade.
4.
Suppose that Hong Kong and Japan can produce two goods, autos and
clothing. The production of autos is relatively capital intensive and the
production of clothing is relatively labor intensive. Suppose that Hong Kong
has relatively abundant labor and that Japan has relatively abundant capital.
Finally, assume that tastes are the same in both countries.
a.
On what basis is comparative advantage determined in this example?
How will the comparative advantage “show up” graphically?
b.
Which country has comparative advantage in autos? In clothing?
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5.
a.
Suppose that Leinster has 8,000,000 acres of land and 2,000,000
laborers, while Saxony has 2,000,000 acres of land and 400,000 laborers.
Which country is relatively labor-abundant? Which is relatively land-abundant?
Explain.
b.
If the land-labor ratio is 10 in the production of telephones, but only 4
in the production of bread, which country is more likely to export telephones?
Bread? Why?
SELECTED ANSWERS
TEXTBOOK, p. 65 #3:
Ratio of Land/Labor: Pugelovia – 0.15
ROW - 0.0875
Pugelovia is relatively land-abundant (0.15 > 0.0875) . Pugelovia will have comparative
advantage in the production of land-intensive wheat and will export it to the “Rest of
the World.” Pugelovia will import labor-intensive cloth from the “Rest of the World.”
ADDITIONAL PROBLEMS:
1.
a.
Absolutely capital abundant - Brazil
Absolutely labor abundant - Brazil
K/L: Argentina – 2.83
Brazil – 1.15
Relatively capital abundant – Argentina
Relatively labor abundant – Brazil
b.
Absolutely capital abundant – U.S.
Absolutely labor abundant – U.S.
K/L: U.S. – 10.26
Canada – 10.58
Relatively capital abundant – Canada (slightly)
Relatively labor abundant – U.S.
c.
Absolutely capital abundant – U.S.
Absolutely labor abundant – U.S.
K/L: U.S. – 10.26
Mexico – 1.68
Relatively capital abundant – U.S.
Relatively labor abundant – Mexico
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2.
a.
Country A
Country B
Relative price of 1X
0.5Y
1Y
Relative price of 1Y
2X
1X
Country A has comparative advantage in X. Country B has comparative advantage in
Y.
b.
Country A
Country B
Relative price of 1X
2Y
1Y
Relative price of 1Y
0.5X
1X
Country A has comparative advantage in Y. Country B has comparative advantage in
X.
c.
Comparative advantage differs depending on consumer preferences in
Country A. (i.e. what combination of X and Y consumers choose with no trade).
3.
a.
Kismet
Shagrila
Relative price of 1 bauble
3 bangles
0.75 bangles
Relative price of 1 bangle
0.33 baubles
1.33 baubles
Shangrila has comparative advantage in baubles. Kismet has comparative advantage in
bangles.
b.
Trade 1 bauble for 1 bangle (between relative prices/terms of trade with
no trade).
Bangles
Bangles
ΔBan/ΔBau = -1
ΔBan/ΔBau = -.75
• BProduction
●A
•
●A
BConsumption
I1
I1
Baubles
ΔBan/ΔBau = -3
KISMET
Export bangles/import baubles
Consume at point BConsumption
Baubles
SHANRILA
Export baubles/import bangles
(You draw!!)
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4.
a.
Comparative advantage occurs on the basis of production differences
between the two countries. Hong Kong’s resource endowment is suited to the
production of labor intensive clothing. Japan’s resource endowment is suited to the
production of capital intensive autos. This will show up graphically as different PPCs
(Hong Kong’s PPC is skewed toward the clothing axis).
Clothing
Clothing
Autos
HONG KONG
Autos
JAPAN
b.
Comparative advantage in autos: Japan; comparative advantage in
clothing: Hong Kong.
5.
a.
Leinster’s ratio of land to labor is 8,000,000/2,000,000 = 4.
Saxony’s ratio of land to labor is 2,000,000/400,000 is 5.
Saxony is relatively land-abundant and Leinster is relatively labor
abundant.
b.
Saxony has comparative advantage in and will export land-intensive
telephones. Leinster has comparative advantage in and will export labor-intensive
bread.