ANTAP, AHMAD NOAINY M.

ECN138-Tt

1. Answer the following questions using the information given by the accompanying table:
Home Foreign Absolute Advantage

Number of bicycles produced per 4 6 Foreign

hour
Number of snowboards produced 8 8 Foreign
per hour
Comparative advantage Snowbo Bicycle
ard
a. Which country has an absolute advantage in the production of bicycles? Which country has an absolute
advantage in the production of snowboards?
 Foreign country has absolute advantage in producing bicycles because it can produce more
of these in an hour than the home. Thus, in producing number of snowboards, there is no
absolute advantage since the home and foreign have the same number of produced
snowboards in an hour.

b. What is the opportunity cost of bicycles in terms of snowboards in Home? What is the opportunity cost
of bicycles in terms of snowboards in Foreign?
 The opportunity cost of bicycle is 2/1 or 2 snowboard at home.
PB/Ps = MPLs/MPLB = 8/4 = 2/1
 The opportunity cost of bicycle is 4/3 or 1.33 snowboard at foreign.
PB*/Ps* = MPLs*/MPLB* = 8/6 = 4/3
c. Which product will Home export, and which product does foreign export? Briefly explain why.
 Home will export snowboard because they have a comparative advantage and lower
opportunity cost in producing the said good, 3/4 B versus 1/4 B for foreign. Foreign, on the
other hand, will export bicycles because they have a comparative advantage and lower
opportunity cost in producing bicycles, with 4/3 S compared to 2 S.

d. Assume that Home and Foreign produce two goods, TVs, and cars, and use the information below to
answer the following questions:

In the No-Trade Equilibrium

H me Foreign
o
WageTV = 12 WageC = ? Wage*TV = ? Wage*C= 6

MPLTV = 4 MPLC = ? MPL*TV= ? MPL*C = 1

PTV = ? PC = 4 P*TV = 8 P*C = ?
a. What is the marginal product of labor for TVs and cars in Home? What is the no-trade relative price of TVs in
Home?

 MPLc = WAGEtv/Pc = 12/4 = 3

MPLtv = 4

Ptv/Pc = MPLc/MPLtv = 3/4

b. What is the marginal product of labor for TVs and cars in Foreign? What is the no-trade relative price of TVs
in Foreign?

 MPL*TV = Wage*C/P*TV = 6/8 = ¾

MPL*C = 1

P*TV/P*C = MPL*C/MPL*TV = 1/(3/4) = 4/3

c. Suppose the world relative price of TVs in the trade equilibrium is PTV/PC = 1. Which good will each
country exports? Briefly explain why.

 Countries should export goods which they have comparative advantage and lower
opportunity cost with. Therefore, Home will export TVs whereas foreign will export cars.

Solution:

HOME: FOREIGN:

TV: MPLc/MPLtv = ¾ C TV: MPL*C/MPL*TV = 1/(3/4) = 4/3 C

Car: MPLtv/MPLc = 4/3 TV Car: MPL*TV/MPL*C = ¾ TV

d. In the trade equilibrium, what is the real wage in Foreign in terms of TVs and in terms of cars? How do these
values compare with the real wage in terms of either good in the no-trade equilibrium?

 Workers are paid in TV terms because Home exports TVs. Furthermore, Home is better
off with trade because there has been an increase in real wage in terms of automobiles.

Home wages with trade:

MPLtv = 4 TVs (Ptv/Pc)(MPLtv) = (1)(4) = 4 cars
Home wages without trade:
MPLtv = 4 TVs (Ptv/Pc)(MPLtv) = (¾)(4) = 3 cars

3. Why do some low-wage countries, such as China, pose a threat to manufacturers in industrial
countries, such as the United States, whereas other low-wage countries, such as Haiti, do not?
Explain concisely and briefly.
 This is because a country's productivity must meet a minimum threshold before it can
engage in international trade. China, for example, has the productivity required to
compete successfully, whereas Haiti does not. China can enter the global market since its
prices are lower than those of other industrial countries. Price is controlled by both wage
rate and productivity under perfect competition; that is, P = Wage/MPL. As a result,
China's reduced price is due to both a low wage rate and a high MPL. Not only does Haiti
have a low pay rate, but it also has a poor MPL. As a result, Haiti's price is too high to
compete in the global market.