1、Chapter 31Home has 1200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2.aGraph out the production possibilities frontier: bWhat is the opportunity cost of apples in terms of bananas?5.1Lba
2、cIn the absence of trade, what would the price of apples in terms of bananas be?In the absence of trade, since labor is the only factor of production and supply decisions are determined by the attempts of individuals to maximize their earnings in a competitive economy, only when will both goods be p
3、roduced. So Lbaba/P 1.5/Pb2Home is as described in problem 1. There is now also another country, Foreign, with a labor force of 800. Foreigns unit labor requirement in apple production is 5, while in banana production it is 1. aGraph Foreigns production possibilities frontier: bConstruct the world r
4、elative supply curve.200 400 600 8000200400600800Homes PPFQappleQbanana80 160 240 320 40002004006008001000Foreigns PPFQ*appleQ*banana3Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples.aGraph the relative demand curve a
5、long with the relative supply curve: ab/P/DWhen the market achieves its equilibrium, we have 1ba)(DbaPQRD is a hyperbola xy1bWhat is the equilibrium relative price of apples?The equilibrium relative price of apples is determined by the intersection of the RD and RS curves. RD: yx1RS: 5,.1,5.0().,yx
6、2 2/bPaecDescribe the pattern of trade. babeaba P/In this two-country world, Home will specialize in the apple production, export apples and import bananas. Foreign will specialize in the banana production, export bananas and import apples. dShow that both Home and Foreign gain from trade.Internatio
7、nal trade allows Home and Foreign to consume anywhere within the colored lines, which lie outside the countries production possibility frontiers. And the indirect method, specializing in producing only one production then trade with other country, is a more efficient method than direct production. I
8、n the absence of trade, Home could gain three bananas by foregoing two apples, and Foreign could gain by one foregoing five bananas. Trade allows each country to trade two bananas for one apple. Home could then gain four bananas by foregoing two apples while Foreign could gain one apple by foregoing
9、 only two bananas. So both Home and Foreign gain from trade.4Suppose that instead of 1200 workers, Home had 2400. Find the equilibrium relative price. What can you say about the efficiency of world production and the division of the gains from trade between Home and Foreign in this case?RD: yx1RS: 5
10、,.1,(1),0yx .32 .1/bPaeIn this case, Foreign will specialize in the banana production, export bananas and import apples. But Home will produce bananas and apples at the same time. And the opportunity cost of bananas in terms of apples for Home remains the same. So Home neither gains nor loses but Fo
11、reign gains from trade.5Suppose that Home has 2400 workers, but they are only half as production in both industries as we have been assuming, Construct the world relative supply curve and determine the equilibrium relative price. How do the gains from trade compare with those in the case described i
12、n problem 4?In this case, the labor is doubled while the productivity of labor is halved, so the effective labor remains the same. So the answer is similar to that in 3. And both Home and Foreign can gain from trade. But Foreign gains lesser compare with that in the case 4. 6 ”Korean workers earn on
13、ly $2.50 an hour; if we allow Korea to export as much as it likes to the United States, our workers will be forced down to the same level. You cant import a $5 shirt without importing the $2.50 wage that goes with it.” Discuss.In fact, relative wage rate is determined by comparative productivity and
14、 the relative demand for goods. Koreas low wage reflects the fact that Korea is less productive than the United States in most industries. Actually, trade with a less productive, low wage country can raise the welfare and standard of living of countries with high productivity, such as United States.
15、 So this pauper labor argument is wrong.7Japanese labor productivity is roughly the same as that of the United States in the manufacturing sector (higher in some industries, lower in others), while the United States, is still considerably more productive in the service sector. But most services are
16、non-traded. Some analysts have argued that this poses a problem for the United States, because our comparative advantage lies in things we cannot sell on world markets. What is wrong with this argument?The competitive advantage of any industry depends on both the relative productivities of the indus
17、tries and the relative wages across industries. So there are four aspects should be taken into account before we reach conclusion: both the industries and service sectors of Japan and U.S., not just the two service sectors. So this statement does not bade on the reasonable logic.8Anyone who has visi
18、ted Japan knows it is an incredibly expensive place; although Japanese workers earn about the same as their U.S. counterparts, the purchasing power of their incomes is about one-third less. Extend your discussing from question 7 to explain this observation. (Hint: Think about wages and the implied p
19、rices of non-trade goods.)The relative higher purchasing power of U.S. is sustained and maintained by its considerably higher productivity in services. Because most of those services are non-traded, Japanese could not benefit from those lower service costs. And U.S. does not have to face a lower int
20、ernational price of services. So the purchasing power of Japanese is just one-third of their U.S. counterparts.9How does the fact that many goods are non-traded affect the extent of possible gains from trade?Actually the gains from trade depended on the proportion of non-traded goods. The gains will
21、 increase as the proportion of non-traded goods decrease. 10We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods, and that each country has only one factor of production, labor. What could we say about the pattern of
22、production and in this case? (Hint: Try constructing the world relative supply curve.)Any countries to the left of the intersection of the relative demand and relative supply curves export the good in which they have a comparative advantage relative to any country to the right of the intersection. If the intersection occurs in a horizontal portion then the country with that price ratio produces both goods.
