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:
*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.
*Identify absolute and comparative advantage of U.S. and Japan.
*Suppose that these two countries engage in free trade. Identify absolute and comparative advantage. Describe the pattern of trade. Explain briefly your reasoning.
*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?