Suppose that the marginal product of labor (MPL) for China and Thailand are
a) Which country has absolute advantage in cell phones?
b) Which country has comparative advantage in cell phones?
c) Suppose China has 100 units of labor. Draw the production possibility
frontier for China.
d) What is the possible range of prices (cell phones to chargers), when
trade is opened?
e) Now consider the effects of trade. Add a world trade price line to your
diagram in c), and illustrate a plausible consumption point for the China.
f) Does China import or export chargers?
g) Based on Chinese consumption during trade, label a amount of Chinese
exports and imports on your diagram.
2. Ricardian Trade
When Mexico and Argentina trade the world price of bicycles to computers is
3. Suppose further that the marginal product of labor for Mexico and Argentina
are the following:
Which country exports bicycles?
What is Mexico’s wage in terms of bicycles and in terms of computers?
What is Argentina’s wage in terms of bicycles and in terms of computers?
What is the relative wage of Mexico relative to Argentina?
3. Specific Factors Model of Trade
Businesses in Finland have made
investments that have created stocks of capital that are devoted to either
telecommunications (T) or business services (B).
a) Suppose that Finland is not
trading. Draw the specific factors diagram for Finland, indicating how labor is
divided between the two industries, and showing the prevailing wage wo.
b) Suppose before trade that the
relative price of telecommunications to business services is 4 in Finland while
the relative price for the rest of the world is 6. What do you predict about
the world price of telecommunications to business services once trade starts?
c) Modify your diagram to show how
Finland’s labor allocation and wage change when it opens trade with the rest of
10. d) How does the opening of trade affect capital owners in
Finland’s business services industry? Describe and show on your graph.
11. e) Can you predict whether Finnish workers are likely to
benefit or lose from the opening of trade? Explain.
12. f) Suppose Finnish workers consume as much telecommunications
as they can, while they buy very few business services. How does this affect
the likely magnitude of worker gains or loses?