1. 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
Computers
|
Endowment of labor
|
|
United States
|
20
|
10
|
100
|
|
Japan
|
15
|
4
|
200
|
You are asked by the CEO to report the following information:
a. 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.
b. Identify absolute and comparative advantage of U.S. and Japan.
c. Suppose that these two countries engage in free trade. Identify absolute and comparative advantage. Describe the pattern of trade. Explain briefly your reasoning.
d. 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?