CHAPTER 2LaborProductivityandComparativeAdvantage:TheRicardianModelAnswerstoTextbookProblems1. a.Theproductionpossibilitycurveisastraightlinethatinterceptstheappleaxisat400(1200/3)andthebananaaxisat600(1200/2).b. Theopportunitycostofapplesintermsofbananasis3/2.Ittakesthreeunitsoflabortoharvestanapplebutonlytwounitsoflabortoharvestabanana.Ifoneforegoesharvestinganapple,thisfreesupthreeunitsoflabor.These3unitsoflaborcouldthenbeusedtoharvest1.5bananas.c. Labormobilityensuresacommonwageineachsectorandcompetitionensuresthepriceofgoodsequalstheircostofproduction.Thus,therelativepriceequalstherelativecosts,whichequalsthewagetimestheunitlaborrequirementforapplesdividedbythewagetimestheunitlaborrequirementforbananas.Sincewagesareequalacrosssectors,thepriceratioequalstheratiooftheunitlaborrequirement,whichis3applesper2bananas.2. a.Theproductionpossibilitycurveislinear,withtheinterceptontheappleaxisequalto160(800/5)andtheinterceptonthebananaaxisequalto800(800/1).b.Theworldrelativesupplycurveisconstructedbydeterminingthesupplyofapplesrelativetothesupplyofbananasateachrelativeprice.Thelowestrelativepriceatwhichapplesareharvestedis3applesper2bananas.Therelativesupplycurveisflatatthisprice.Themaximumnumberofapplessuppliedatthepriceof3/2is400suppliedbyHomewhile,atthisprice,Foreignharvests800bananasandnoapples,givingamaximumrelativesupplyatthispriceof1/2.Thisrelativesupplyholdsforanypricebetween3/2and5.Atthepriceof5,bothcountrieswouldharvestapples.Therelativesupplycurveisagainflatat5.Thus,therelativesupplycurveisstepshaped,flatattheprice3/2fromtherelativesupplyof0to1/2,verticalattherelativequantity1/2risingfrom3/2to5,andthenflatagainfrom1/2toinfinity.3. a.Therelativedemandcurveincludesthepoints(1/5,5),(1/2,2),(1,1),(2,1/2).b. Theequilibriumrelativepriceofapplesisfoundattheintersectionoftherelativedemandandrelativesupplycurves.Thisisthepoint(1/2,2),wheretherelativedemandcurveintersectstheverticalsectionoftherelativesupplycurve.Thustheequilibriumrelativepriceis2.c. Homeproducesonlyapples,Foreignproducesonlybananas,andeachcountrytradessomeofitsproductfortheproductoftheothercountry.d. Intheabsenceoftrade,Homecouldgainthreebananasbyforegoingtwoapples,andForeigncouldgainbyoneappleforegoingfivebananas.Tradeallowseachcountrytotradetwobananasforoneapple.HomecouldthengainfourbananasbyforegoingtwoappleswhileForeigncouldgainoneapplebyforegoingonlytwobananas.Eachcountryisbetteroffwithtrade.4. TheincreaseinthenumberofworkersatHomeshiftsouttherelativesupplyschedulesuchthatthecornerpointsareat(1,3/2)and(1,5)insteadof(1/2,3/2)and(1/2,5).Theintersectionoftherelativedemandandrelativesupplycurvesisnowinthelowerhorizontalsection,atthepoint(2/3,3/2).Inthiscase,ForeignstillgainsfromtradebuttheopportunitycostofbananasintermsofapplesforHomeisthesamewhetherornotthereistrade,soHomeneithergainsnorlosesfromtrade.5. Thisanswerisidenticaltothatin3.Theamountofeffectivelaborhasnotchangedsincethedoublingofthelaborforceisaccompaniedbyahalvingoftheproductivityoflabor.6. Thisstatementisjustanexampleofthepauperlaborargumentdiscussedinthechapter.Thepointisthatrelativewageratesdonotcomeoutofthinair;theyaredeterminedbycomparativeproductivityandtherelativedemandforgoods.Theboxinthechapterprovidesdatawhichshowsthestrongconnectionbetweenwagesandproductivity.KoreaslowwagepresumablyreflectsthefactthatKoreaislessproductivethantheUnitedStatesinmostindustries.Asthetestexampleillustrated,ahighlyproductivecountrythattradeswithalessproductive,low-wagecountrywillraise,notlower,itsstandardofliving.7. Theproblemwiththisargumentisthatitdoesnotusealltheinformationneededfordeterminingcomparativeadvantageinproduction:thiscalculationinvolvesthefourunitlaborrequirements(forboththeindustryandservicesectors,notjustthetwofortheservicesector).Itisnotenoughtocompareonlyservicesunitlaborrequirements.Ifalsals*,Homelaborismoreefficientthanforeignlaborinservices.WhilethisdemonstratesthattheUnitedStateshasanabsoluteadvantageinservices,thisisneitheranecessarynorasufficientconditionfordeterminingcomparativeadvantage.Forthisdetermination,theindustryratiosarealsorequired.Thecompetitiveadvantageofanyindustrydependsonboththerelativeproductivitiesoftheindustriesandtherelativewagesacrossindustries.8. WhileJapaneseworkersmayearntheequivalentwagesofU.S.workers,thepurchasingpoweroftheirincomeisone-thirdless.Thisimpliesthatalthoughw=w*(moreorless),pp*(since3p=p*).SincetheUnitedStatesisconsiderablymoreproductiveinservices,servicepricesarerelativelylow.ThisbenefitsandenhancesU.S.purchasingpower.However,manyoftheseservicescannotbetransportedandhence,arenottraded.ThisimpliesthattheJapanesemaynotbenefitfromthelowerU.S.servicescosts,anddonotfaceaninternationalpricewhichislowerthantheirdomesticprice.Likewise,thepriceofservicesinUnitedStatesdoesnotincreasewiththeopeningoftradesincetheseservicesarenon-traded.Consequently,U.S.purchasingpowerishigherthanthatofJapanduetoitslowerpricesonnon-tradedgoods.9. Gainsfromtradestillexistinthepresenceofnontradedgoods.Thegainsfromtradedecli