Helwan University

Faculty of Commerce & Business Administration
Business Information Systems (BIS)

Fall 2014/2015
Economics of Foreign Trade

Instructors: Dr. Marwa Assem & Dr. Ahmed Abdel-Halim

Solution Key to Assignment 1
Question 1:
Suppose you are given the following information about the productivity of labor in Japan
and India.
Table 1.1: Number of units produced per labor hour
LCDs

Japan
2

India
1

Textiles

5

8

A. In table 1.2 below, calculate the labor cost of producing each good in each country.
Labor cost is the inverse (reciprocal) of productivity. If labor in Japan can produce 2 LCDs
per labor hour, so the cost of each LCD is ½ labor hour; and so forth.
Table 1.2: Labor Costs (in labor hours)
Japan

India

LCDs
Textiles
B. Which country has an absolute advantage in LCDs? In textiles? Explain.
-

Since 2 > 1 (or 0.5 < 1), Japan can produce LCDs at a higher productivity (lower
labor cost). Therefore, Japan has an absolute advantage in producing LCDs.

-

Since 8 > 5 (or 0.125 < 0.2), India can produce textiles at a higher productivity
(lower labor cost). Therefore, India has an absolute advantage in producing textiles.

C. Could international trade occur and be mutually beneficial based on absolute
advantage? Why or why not?
Yes. Because each country has an absolute advantage in producing one commodity and has
an absolute disadvantage in producing the other commodity. Trade will be mutually
beneficial if Japan specializes in producing and exporting LCDs and India specializes in
producing and exporting textiles.
D. Calculate the opportunity costs of producing LCDs and Textiles in each country. Show
your calculations. Summarize your results in table 1.3 below.

Page 1 of 6

125 < 0. - Since 2. Therefore. Based on your answer in C. India can produce textiles at a lower opportunity cost. India has a comparative advantage in producing textiles. Japan can produce LCDs at a lower opportunity cost. Page 2 of 6 .3: Units Opportunity Costs Japan India LCDs Textiles E.5 < 8.4. which country has a comparative advantage in LCDs? In textiles? Explain. Japan has a comparative advantage in producing LCDs.In each country: - The opportunity cost of an LCD is given by: - The opportunity cost of a unit of textiles is given by: Using productivity: Table 1. - Since 0. Therefore.3: Units Opportunity Costs Japan India LCDs Textiles Using labor costs: Table 1.

5: Production after Specialization Japan LCDs Textiles India 0 0 H. the international rate of exchange is 1 LCD for 4 units of textiles (1L = 4T). That is: it should be somewhere between 1 LCD for 2. Similarly. Page 3 of 6 . Table 1. India should specialize in producing and exporting textiles. A gain of 150 units of textiles. so trade will be mutually beneficial. Japan should specialize in producing and exporting LCDs - India has a comparative advantage in producing textiles.Suppose that each country has a total of 100 labor hours. Before specialization. show the pattern of production after specialization in both countries. the two countries will exchange 80 LCDs for 320 units of textiles. In table 1. - Japan has a comparative advantage in producing LCDs. A gain of 50 LCDs. In table 1.4 below. What is the international rate of exchange in this case? Will trade be mutually beneficial under this rate? Why or why not? (Hint: What is the range for the international rate of exchange that makes trade mutually beneficial?) - The two countries will exchange 80 LCDs for 320 units of textiles Therefore. Therefore.4: Production & Consumption before Specialization Japan India LCDs Textiles G.5 below. show the pattern of consumption and production before specialization and trade in both countries. Suppose further that once trade occurs. total world production in textiles increased from 650 (250 + 400) to 800. What are the total gains in world production due to specialization based on comparative advantage? - Total world production in LCDs increased from 150 (100 + 50) to 200. - The range of mutually beneficial trade is that the international rate of exchange should lie between the two opportunity costs. - The current rate lies in this range.5 units of textiles (1L = 2. F. Therefore. I. - Specialization is complete! Table 1.5T) to 1 LCD for 8 units of textiles (1L = 8T). each country allocates 50 labor hours in the production of each good.

7: Gains from Trade (in labor hours) LCDs Japan +20 × 0. show the pattern of consumption after trade in both countries.1: Production Possibilities per worker Finland Mobile phones 32 Boats 4 Canada 40 10 A. Calculate the gains from trade to each country in table 1.7 and show that international trade based on comparative advantage is mutually beneficial. then add them up! Japan saved 24 labor hours.5 = +10 India +30 × 1 = +30 Textiles +70 × 0. Which country has an absolute advantage in mobile phones? In boats? Explain.6.J. while India saved 40 labor hours. In table 1.. Page 4 of 6 . Canada enjoys absolute advantage in the production of both. Table 1.125 = +10 Both Goods +24 LHs + 40 LHs Just multiply the gains (in units) by their relative labor costs. Since Canada can produce more per worker than Finland in both goods.2 = +14 +80 × 0. Question 2: Suppose in Finland a worker can produce either 32 mobile phones or 4 boats while in Canada a worker can produce either 40 mobile phones or 10 boats.7: Gains from Trade (in units of the two goods) LCDs Japan 120 – 100 = +20 India 80 – 50 = +30 Textiles 320 – 250 = +70 480 – 400 = +80 L. Express the gains from trade you calculated in part K in terms of labor hours saved. Table 1. Table 2.6: Consumption after Trade Japan India LCDs Textiles K. Table 1.

000 – 28.800 = +3. - Canada can produce B at a lower opportunity cost (4 < 8).4: Production after Specialization Finland Mobile phones 1000 × 32 = 32.400 = +1.000 workers. Which country has a comparative advantage in mobile phones? In boats? Explain.3 below. Therefore.125 < 0.B.2: Opportunity Costs per unit Mobile phones Boats 4/32 = 0.400 E.800 Boats 600 × 4 = 2. What is the pre-specialization output of mobile phones and boats? Write your answers in Table 2.600 Page 5 of 6 . Therefore. Table 2. Finland has a comparative advantage in producing MP. Complete Table 2.3: Production and Consumption before Specialization Finland Mobile phones 400 × 32 = 12. - Again.2 below.25). Suppose each country specializes in the production of the good in which it has a comparative advantage. Write your answers in Table 2.000 Total 32. Suppose each country has 1. - Finland will specialize in producing and exporting MP while Canada will specialize in producing and exporting B. - Finland can produce MP at a lower opportunity cost (0.000 Boats 0 Canada 0 1000 × 10 = 10. Before specialization.000 600 × 10 = 6.125 B 32/4 = 8 MP Finland Canada 10/40 = 0.200 10.000 10. - In each country before specialization. specialization is complete! Table 2.4 below. Calculate the opportunity costs of producing one unit of each good in each country. 400 workers will be producing MP and 600 will be producing B. Table 2.400 Canada 400 × 40 = 16.000 – 8.000 Total Gains from Specialization 32. D.25 B 40/10 = 4 MP C. Canada has a comparative advantage in producing B. each country devotes 40% of its labor to mobile phone production and 60% to boat production.000 Total 28.800 8.

600 Page 6 of 6 .000 Canada 0 + 18.000 = +1.000 mobile phones.5: Consumption after Trade Finland Mobile phones 32.200 Boats 3.000 = 14.000 = 3.6 below.000 – 16.800 = +1.5 and 2.000 Boats 0 + 3.000 – 12.F.000 10.000 boats for 18.400 = +600 Canada 18.000 Total +3. Calculate consumption after trade as well as gains from trade in each country. Assume that with trade. the two countries will exchange 3. Use your answers to complete tables 2.000 7.000 – 18.000 = +2. Table 2.000 Table 2.000 – 6.000 – 3.000 = 7.000 = 18.000 – 2.6: Gains from Trade Finland Mobile phones 14.200 +1.