* Suppose that the U.S and Japan are two Ricardian economies. Both countries can produce only two goods; automobiles and computers. The characteristics of each economy are summarized in the following table.
|
|
Labor Productivity in Automobiles |
Labor Productivity in |
Endowment of labor |
|
United States |
20 |
10 |
100 |
|
Japan |
15 |
4 |
200 |
You are asked by the CEO to report the following information:
*Graph the production possibility frontier of both countries with computers on the horizontal axis and automobiles on the vertical axis. Please label the axes and calculate the intercepts.
*Identify absolute and comparative advantage of U.S. and Japan.
*Suppose that these two countries engage in free trade. Identify absolute and comparative advantage. Describe the pattern of trade. Explain briefly your reasoning.
*Suppose that the relative price of computers in terms of automobiles after trade is 3 [units (number) of automobiles per unit (number) of computers]. Using the same diagrams as in question 1a graph the consumption possibility frontier for both countries. Do both countries gain from trade?
