Suppose that the marginal product of labor (MPL) for China and Thailand are the following
Cell Phones chargers
China 30 40
Thailand 30 50
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:
Bicycles Computers
Mexico 4 8
Argentina 2 7
1. d) Which country exports bicycles?
2. e) What is Mexico’s wage in terms of bicycles and in terms of computers?
3. f) What is Argentina’s wage in terms of bicycles and in terms of computers?
4. g) What is the relative wage of Mexico relative to Argentina?
5. 3. Specific Factors Model of Trade
6. Businesses in Finland have made investments that have created stocks of capital that are devoted to either telecommunications (T) or business services (B).
7. 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.
8. 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?
9. c) Modify your diagram to show how Finland’s labor allocation and wage change when it opens trade with the rest of the world.
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?
