Question 1 (15 points)
Consider the productivity of labour in computer chip and shirt production in Germany and Korea in the year 2010. Treat Germany as the home country.
Computer Chips Shirts
Germany aC = 12 chips per hour aS= 5 shirts per hour
Korea a*C = 4 chip per hour a*S = 4 shirt per hour
- Determine the pattern of comparative advantage. What would the autarky relative price of shirts be in each country in equilibrium? Explain clearly. Use a graph to support your answer. (3 points)
- If the free trade relative price of shirts is 1.5, show how each country gains from trade. Draw production possibilities graphs to support your answer. (2 points)
- The 2010 wage was $44 per hour in Germany and $16.7 per hour in Korea. Is this consistent with trade according to comparative advantage? In other words, are unit costs in each country in line with the trade pattern predicted by opportunity costs? Show clearly. (2 points)
- Suppose you replace Germany in the table above by Spain. For Spain, aC = 5 chips per hour and aS= 3 shirts per hour. How is the pattern of absolute advantage and comparative advantage changed (if at all)? (2 points)
If trade is according to comparative advantage, what is the range within which the Spanish wage (relative to Korea’s) must lie? Be sure to explain how you arrived at your answer. (2 points)
If trade is according to comparative advantage, is it at all possible for Korea to have a higher wage in the example being considered? Explain. (2 points)
- Spain’s wage was $26.60 per hour in 2010. Is this consistent with trade according to opportunity costs? Explain.(2 points)
Question 2 (8 points)
The table below contains data on Canada’s wages and relative productivity in manufacturing relative to the wages and productivity in a group of developed and developing countries in 2000 and 2010.
Canada’s relative productivity Canada’s relative wage
2000 2010 2000 2010
US 113.4 74.8 109 140.5
France 106 90.1 110.9 104.8
Germany 104.4 95.2 107.7 113.3
Japan 102.2 80.9 87.4 131.6
UK 107.9 87.6 109.3 128.7
Taiwan 117.6 62.7 105.6 91.1
Korea 110.9 63.6 102.6 129.5
Singapore 99.5 78.9 94.9 136.4
Source: US Bureau of Labour Statistics
- In the year 2000, explain whether Canada has an absolute advantage or disadvantage in manufacturing in
comparison with each of the assigned countries. (1 point)
- Choose any two countries from the table. Can you determine which of these two countries has an absolute
advantage in manufacturing vis-à-vis the other? Explain clearly. (2 points)
- What can you say about Canada’s competiveness in manufacturing vis-à-vis each of these countries? (2 points)
- Explain how your answers to the previous parts are modified (if at all) if you look at 2010. (3 points)
Question 3 (7 points)
The table below gives the wage rate and the productivity of labour in several industries in Spain and the UK. The exchange rate between the UK currency (pounds) and the Spanish currency (Euros) is 1 Euro=0.85 British pounds.
|
Country |
Wage rate
(per hour) |
Labour productivity per hour | |||||
|
Wine |
Cutlery |
Cloth |
Hardware |
Wheat |
Cheese |
||
| Spain | 20 Euros | 6 | 5 | 10 | 9 | 9 | 7 |
| UK | 22 pounds | 7 | 10 | 15 | 15 | 10 | 8 |
- Rank the industries in terms of UK’s relative productivity. Then explain which goods will be exported (imported) by each country. (3 points)
- Verify that for every good Spain exports, the unit cost is lower in Spain while for every good it imports, Spain’s unit cost is higher. (2 points)
- Suppose an increased preference for leisure in the UK reduces labour supply and pushes up the UK wage to 28 pounds per hour. Explain how the pattern of trade will be affected by this development, ceteris paribus. (2 points)
