Chapter 3

L
a
b
o
r
P
r
o
d
u
c
t
i
v
i
t
y
a
n
d
C
o
m
p
a
r
a
t
i
v
e
A
d
v
a
n
t
a
g
1

e: The
Ricardian
Model

B
o
t
h

3
The
Concept of
Comparati
ve
Advantage

C
a
n
d
D
.

Trade
between two
countries can
benefit both
countries if

P
r
e
v
i
o
u
s

each country
exports that
good in
which it has
a
comparative
advantage.

E
d
i
t
i
o
n

each country
enjoys
superior
terms of
trade.

each country
has a more
elastic
demand for
the imported
goods.

I
n
o
r
d
e
r

each country
has a more
elastic supply
for the
exported
goods.

t
o
k
n
2

ow whether a
country has a
comparative
advantage in
the
production of
one
particular
product we
need
information
on at least
________ unit
labor
requirements

i
s
p
r
o
d
u
c
i
n
g
e
x
p
o
r
t
s

one

two

i
n
d
i
r
e
c
t
l
y

three

four

five
A
D

Q
Previous
Edition

m
o
r
e
e
f
f
i
c
i
e
n
t
l
y

A country
engaging in
trade
according to
the principles
of
comparative
advantage
gains from
trade because
it

t
h
3

an it could
alternatively.

h
o
m
e

is producing
imports
indirectly
more
efficiently
than it could
domestically.

s
h
o
u
l
d

is producing
exports using
fewer labor
units.

e
x
p
o
r
t

is producing
imports
indirectly
using fewer
labor units.

c
l
o
t
h
.

None of the
above.
A
B
Q
Previous
Edition

e
x
p
o
r
t
w
i
d
g
e
t
s
.

Given the
information
in the table
above, if it is
ascertained
that Foreign
uses prisonslave labor to
produce its
exports, then

e
x
p
4

ort both and

import
nothing.

G
i
v
e
n

export and
import
nothing.

t
h
e

All of the
above.
A
A

i
n
f
o
r
m
a
t
i
o
n

Q
Previous
Edition

i
n
t
h
e
t
a
b
l
e
a
b
o
v
e
,
i
f
t
h
e
5

Home
economy
suffered a
meltdown,
and the Unit
Labor
Requirement
s doubled to
30 for cloth
and 60 for
widgets then
home should

D
a
v
i
d

export cloth.

D
a
v
i
d

H
u
m
e
.

export
widgets.

R
i
c
a
r
d
o
.

export both
and import
nothing.

export and
import
nothing.

All of the
above.
A
A

A
d
a
m

Q
Previous
Edition

S
m
i
t
h
.

The earliest
statement of
the principle
of
comparative
advantage is
associated
with

E
l
i
H
e
6

ckscher.

a
b
o
v
e
.

Bertil Ohlin.
A
B
Q
Previous
Edition

P
r
e
v
i
o
u
s

The Gains
from Trade
associated
with the
principle of
Comparative
Advantage
depends on

E
d
i
t
i
o
n

the trade
partners
must differ in
technology
or tastes.

T
h
e

there can be
no more
goods traded
than the
number of
trade
partners.

R
i
c
a
r
d
i
a
n

there may be
no more
trade
partners than
goods
traded.

m
o
d
e
l

All of the
above.

d
e
m

None of the
7

onstrates that

trade
between two
countries will
benefit both
countries.

O
n
e
F
a
c
t
o
r

trade
between two
countries
may benefit
both
regardless of
which good
each exports.

E
c
o
n
o
m
y

trade
between two
countries
may benefit
both if each
exports the
product in
which it has
a
comparative
advantage.

G
i
v
e
n
t
h
e

trade
between two
countries
may benefit
one but harm
the other.

f
o
l
l
o
w
i
n
g

None of the
above.
A
C
Q
New

i
n
f
o
8

rmation:

(
b
)
T
h
e

(a)
What
is the
marginal cost
of a toy in
each
country?
(b)
How
might you
demonstrate
(quantitativel
y) that a
country with
absolute
productivity
advantage in
a product
may find that
its
production is
more costly
than in the
other
(unproductiv
e) country?
(c)

U
.
S
.
h
a
v
e
a
b
s
o
l
u
t
e
p
r
o
d
u
c
t
i
v
i
t
y

Demonstrate
the fact that
trade
produces
imports
(indirectly)
cheaper, even
in the
relatively
unproductive
country.
A
(a)
3
units of Soy
in the U.S.,
and 1 Soy
unit in
Croatia.

a
d
v
a
n
t
a
g
e
i
9

n toys.
Nevertheless,
toys are three
times more
costly than
they are in
Croatia.
(c)
In
Croatia, one
unit of soy
will cost one
toy. However,
if the terms
of trade fall
between the
two autarkic
price ratios (a
condition
necessary for
both
countries to
enjoy gains
from trade),
say at 2 Soy
units per toy,
then Croatia
will gain
each Soy unit
with less of a
sacrifice of
toy
production.

i
n
t
h
e
t
a
b
l
e
a
b
o
v
e

n
e
i
t
h
e
r
c
o
u
n
t
r
y

Q
Previous
Edition

3
Trade in a
One-Factor
World

h
a
s
a
c
o
m
p
a
r
a
t

Given the
information
10

ive
advantage.

e
x
p
o
r
t

Home has a
comparative
advantage in
cloth.

b
o
t
h

Foreign has a
comparative
advantage in
cloth.

a
n
d

Home has a
comparative
advantage in
widgets.

i
m
p
o
r
t

Home has a
comparative
advantage in
both
products.
A
B

n
o
t
h
i
n
g
.

Q
Previous
Edition

e
x
p
o
r
t

Given the
information
in the table
above, if
wages were
to double in
Home, then
Home should

a
n
d

export cloth.

i
m
p
o
r
t

export
widgets.

11

nothing.
G
i
v
e
n

All of the
above.
A
A
Q
Previous
Edition

t
h
e
i
n
f
o
r
m
a
t
i
o
n
i
n
t
h
e
t
a
b
l
e
a
b
o
v
e

n
e
i
t
h
e
12

r country has
a
comparative
advantage.

p
r
o
d
u
c
e

Home has a
comparative
advantage in
cloth.

i
t
s

Foreign has a
comparative
advantage in
cloth.

e
x
p
o
r
t
s
,

Foreign has a
comparative
advantage in
widgets.

t
h
e
n

Home has a
comparative
advantage in
both
products.
A
C

h
o
m
e

Q
Previous
Edition

s
h
o
u
l
d

Given the
information
in the table
above, the
opportunity
cost of cloth
in terms of
widgets in
Foreign is if
it is
ascertained
that Foreign
uses prisonslave labor to

e
x
p
o
r
t
c
l
o
t
13

h.

n
o
t
h
i
n
g
.

export
widgets.

export both
and import
nothing.

A
l
l

export and
import
nothing.

o
f

All of the
above.
A
B

t
h
e

Q
Previous
Edition

a
b
o
v
e
.

Given the
information
in the table
above, if
wages were
to double in
Home, then
Home should

P
r
e
v
i
o
u
s

export cloth.

export
widgets.

E
d
i
t
i
o
n

export both
and import
nothing.

export and
import

G
14

iven the
information
in the table
above, if the
world
equilibrium
price of
widgets were
4 Cloths,
then

w
a
n
t
t
o
s
p
e
c
i
a
l
i
z
e

both
countries
could benefit
from trade
with each
other.

i
n

neither
country
could benefit
from trade
with each
other.

c
l
o
t
h
.

each country
will want to
export the
good in
which it
enjoys
comparative
advantage.

P
r
e
v
i
o
u
s

neither
country will
want to
export the
good in
which it
enjoys
comparative
advantage.

E
d
i
t
i
o
n

both
countries will

G
15

iven the
information
in the table
above, if the
world
equilibrium
price of
widgets were
40 cloths,
then

w
a
n
t
t
o
s
p
e
c
i
a
l
i
z
e

both
countries
could benefit
from trade
with each
other.

i
n

neither
country
could benefit
from trade
with each
other.

c
l
o
t
h
.

each country
will want to
export the
good in
which it
enjoys
comparative
advantage.

P
r
e
v
i
o
u
s

neither
country will
want to
export the
good in
which it
enjoys
comparative
advantage.

E
d
i
t
i
o
n

both
countries will
16

B
In a two
product two
country
world,
international
trade can
lead to
increases in

P
r
e
v
i
o
u
s
E
d
i
t
i
o
n

consumer
welfare only
if output of
both
products is
increased.

output of
both
products and
consumer
welfare in
both
countries.

A
s
a
r
e
s
u
l
t

total
production of
both
products but
not consumer
welfare in
both
countries.

o
f
t
r
a
d
e
,

consumer
welfare in
both
countries but
not total
production of
both
products.

s
p
e
c
i
a
l

None of the
above.
17

ization in the
Ricardian
model tends
to be

A
s
a
r
e
s
u
l
t

complete
with constant
costs and
with
increasing
costs.

o
f

complete
with constant
costs and
incomplete
with
increasing
costs.

t
r
a
d
e
b
e
t
w
e
e
n

incomplete
with constant
costs and
complete
with
increasing
costs.

t
w
o

incomplete
with constant
costs and
incomplete
with
increasing
costs.

c
o
u
n
t
r
i
e
s

None of the
above.
A
B

w
h
i
c
h

Q
Previous
Edition

10)

a
r
18

e of
completely
different
economic
sizes,
specialization
in the
Ricardian
2X2 model
tends to be

a
c
c
o
r
d
i
n
g
t
o

incomplete in
both
countries

t
h
e

complete in
both
countries

R
i
c
a
r
d
i
a
n

complete in
the small
country but
incomplete in
the large
country

m
o
d
e
l

complete in
the large
country but
incomplete in
the small
country

w
i
l
l

None of the
above.
A
C

f
i
n
d

Q
Previous
Edition

i
t
s

11)

c
o
n
s

A nation
engaging in
trade
19

umption
bundle

e
x
c
e
p
t

inside its
production
possibilities
frontier.

w
h
i
c
h
?

on its
production
possibilities
frontier.

outside its
production
possibilities
frontier.

l
i
m
i
t

inside its
tradepartner's
production
possibilities
frontier.

s
p
e
c
i
a
l
i
z
a
t
i
o
n

on its tradepartner's
production
possibilities
frontier.
A
C
Q
Previous
Edition

a
n
d

12)

t
h
e

In the
Ricardian
model, if a
country's
trade is
restricted,
this will
cause all

d
i
v
i
s
i
20

on of labor
I
f

reduce the
volume of
trade and the
gains from
trade

a
v
e
r
y

cause nations
to produce
inside their
production
possibilities
curves

s
m
a
l
l

may result in
a country
producing
some of the
product of its
comparative
disadvantage

c
o
u
n
t
r
y

None of the
above.
A
C

t
r
a
d
e
s

Q
Previous
Edition

w
i
t
h
a
v
e
r
y
l
a
r
g
e
21

country
according to
the Ricardian
model, then

d
o
m
e
s
t
i
c

the small
country will
suffer a
decrease in
economic
welfare.

c
o
s
t

the large
country will
suffer a
decrease in
economic
welfare.

r
a
t
i
o
o
f

the small
country only
will enjoy
gains from
trade.

H
a
n
d

the large
country will
enjoy gains
from trade.

t
h
a
t
o
f

None of the
above.
A
C

F
,

Q
Previous
Edition

t
h
e
n

14)
If the world
terms of
trade for a
country are
somewhere
between the

c
o
u
n
22

try H but not

country F
will gain
from trade.

f
r
o
m

country H
and country
F will both
gain from
trade.

t
r
a
d
e
.

neither
country H
nor F will
gain from
trade.

c
o
u
n
t
r
y

only the
country
whose
government
subsidizes its
exports will
gain.

H
a
n
d
c
o
u
n
t
r
y

None of the
above.
A
B
Q
Previous
Edition

15)

w
i
l
l

If the world
terms of
trade equal
those of
country F,
then

b
o
t
h

country H
but not
country F
will gain

g
a
i
23

n from trade.

n
e
i
t
h
e
r

neither
country H
nor F will
gain from
trade.

c
o
u
n
t
r
y

only the
country
whose
government
subsidizes its
exports will
gain.

H
n
o
r

None of the
above.
A
A

Q
Previous
Edition

w
i
l
l

16)
If the world
terms of
trade equal
those of
country H,
then

g
a
i
n
f
r
o
m

country H
but not
country F
will gain
from trade.

t
r
a
d
e
.

country H
and country
F will both
gain from
trade.

o
n
l
24

y the country
whose
government
subsidizes its
exports will
gain.

N
o
n
e

None of the
above.
A
E

t
h
e

o
f

Q
Previous
Edition

a
b
o
v
e
.

17)
According to
Ricardo, a
country will
have a
comparative
advantage in
the product
in which its

P
r
e
v
i
o
u
s

labor
productivity
is relatively
low.

E
d
i
t
i
o
n

labor
productivity
is relatively
high.

labor
mobility is
relatively
low.

labor
mobility is
relatively
high.

25

18)

e
q
u
a
l
e
d

Assume that
labor is the
only factor of
production
and that
wages in the
United States
equal $20 per
hour while
wages in
Japan are $10
per hour.
Production
costs would
be lower in
the United
States as
compared to
Japan if

1
5
a
n
d
J
a
p
a
n
'
s

U.S. labor
productivity
equaled 40
units per
hour and
Japan's 15
units per
hour.

2
5
u
n
i
t
s
p
e
r

U.S.
productivity
equaled 30
units per
hour whereas
Japan's was
20.

h
o
u
r
.

U.S. labor
productivity
equaled 20
and Japan's
30.

N
o
n
e

U.S. labor
productivity

o
f
26

the above.
A
A

M
R
T
s

Q
Previous
Edition

19)

b
u
t

If two
countries
engage in
Free Trade
following the
principles of
comparative
advantage,
then

n
o
t
r
e
l
a
t
i
v
e

neither
relative
prices nor
relative
marginal
costs
(marginal
rates of
transformatio
n-MRTs) in
one country
will equal
those in the
other
country.

p
r
i
c
e
s
w
i
l
l
b
e
c
o
m
e

both relative
prices and
MRTs will
become equal
in both
countries.

e
q
u
a
l

relative
prices but not
MRTs will
become equal
in both
countries.

i
n
27

both
countries.

i
f
i
t

None of the
above.
A
C

d
e
c
r
e
a
s
e
s

Q
Previous
Edition

20)
Let us define
the real wage
as the
purchasing
power of one
hour of labor.
In the
Ricardian
2X2 model, if
two countries
under
autarky
engage in
trade then

i
n
t
h
e
o
t
h
e
r
.

the real wage

will not be
affected since
this is a
financial
variable.

t
h
e
r
e
a
l

the real wage

will increase
only if a
country
attains full
specialization
.

w
a
g
e
w
i
l
l

the real wage

will increase
in one
country only
28

rise in both
countries.

c
o
u
n
t
r
y

None of the
above.
A
D
Q
Previous
Edition

i
s
m
o
r
e

21)
In a two
country and
two product
Ricardian
model, a
small
country is
likely to
benefit more
than the
large country
because

l
i
k
e
l
y
t
o
f
u
l
l
y

the large
country will
wield greater
political
power, and
hence will
not yield to
market
signals.

s
p
e
c
i
a
l
i
z
e
.

the small
country is
less likely to
trade at price
equal or close
to its autarkic
(domestic)
relative
prices.

t
h
e

the small

s
29

mall country
is less likely
to fully
specialize.

A
n
e
x
a
m
i
n
a
t
i
o
n

None of the
above.
A
B
Q
New

22)
In the
Ricardian
model,
comparative
advantage is
not likely be
due to

o
f
t
h
e

scale
economies.

R
i
c
a
r
d
i
a
n

home
product taste
bias.

greater
capital
availability
per worker.

m
o
d
e
l

All of the
above.

o
f

None of the
above.
A
D

c
o
m
p
a
r
a
t

Q
New

30

ive
advantage
yields the
clear result
that trade is
(potentially)
beneficial for
each of the
two trading
partners
since it
allows for an
expanded
consumption
choice for
each.
However, for
the world as
a whole the
expansion of
production of
one product
must involve
a decrease in
the
availability of
the other, so
that it is not
clear that
trade is better
for the world
as a whole as
compared to
an initial
situation of
non-trade
(but efficient
production in
each
country). Are
there in fact
gains from
trade for the
world as a
whole?
Explain.
A
If we were to
combine the
production
possibility

f
r
o
n
t
i
e
r
s
o
f
t
h
e
t
w
o
c
o
u
n
t
r
i
e
s
t
o
c
r
e
a
t
e
a
s
i
n
g
l
e
w
31

orld
production
possibility
frontier, then
it is true that
any change
in production
points (from
autarky to
specialization
with trade)
would
involve a
tradeoff of
one good for
another from
the world's
perspective.
In other
words, the
new solution
cannot
possibly
involve the
production of
more of both
goods.
However,
since we
know that
each country
is better off at
the new
solution, it
must be true
that the
original
points were
not on the
trade
contract
curve
between the
two
countries,
and it was in
fact possible
to make
some people
better off
without

m
a
k
i
n
g
o
t
h
e
r
s
w
o
r
s
e
o
f
f
,
s
o
t
h
a
t
t
h
e
n
e
w
s
o
l
u
t
i
o
n
d
32

oes indeed
represent a
welfare
improvement
from the
world's
perspective.

t
h
e
n
a

Q
Previous
Edition

c
o
u
n
t
r
y

24)
It is generally
claimed that
a movement
from autarky
to free trade
consistent
with
Ricardian
comparative
advantage
increases the
economic
welfare of
each of the
trade
partners.
However, it
may be
demonstrate
d that under
certain
circumstance
s, not
everyone in
each country
is made
better off.
Illustrate
such a case.
A
(a)
If
intergenerational,
or economic
growth
consideration
s are taken
into account,

m
a
y
e
n
d
u
p
s
p
e
c
i
a
l
i
z
i
n
g
i
n
a
g
o
o
d
t
h
33

at has no or
few growth
linkages with
the rest of the
economy
(e.g. an
"enclave"
sector).
(b)
If
some of the
residents of a
country have
tastes biased
toward their
exportable,
then they
may suffer
due to the
tradeaffected
increase in
the market
price of the
exportable
good.

c
o
u
n
t
e
r
e
x
a
m
p
l
e
t
o
t
h
i
s
p
r
o
p
o
s
i
t
i
o
n
.

Q
Previous
Edition

25)
It is generally
claimed that
state trading,
or centrally
controlled
trading will
tend to reach
a lower
economic
welfare than
would be
reached by
allowing
market forces
to determine
trade flow
directions
and terms of
trade.
Illustrate a

I
n
g
e
n
e
r
a
l
,
i
34

f we begin
with any
suboptimal
distortion,
the theory of
the second
best tells us
that an
additional
"distortion"
may move a
country in
the correct
direction of a
welfare
improvement
. For
example, If a
country has
an
overvalued
exchange rate
(that is, its
currency is
overpriced in
the foreign
exchange
markets), it is
possible that
it will find
itself in an
autarkic
equilibrium
(that is, it
might
"overprice
itself out of
the
international
market"). In
such a case it
is easy to
demonstrate
that if the
government
exports the
goods in
which the
country
enjoys
comparative

a
d
v
a
n
t
a
g
e
,
a
n
d
i
m
p
o
r
t
s
t
h
e
o
t
h
e
r
(
b
y
p
a
s
s
i
n
g
m
a
r
k
e
t
35

prices and
mechanisms)
, the
country's
economic
welfare will
improve.

b
e
c
a
u
s
e

Q
Previous
Edition

t
h
e
r
e

26)
The
Ricardian
proposition
that
international
trade will
benefit any
country
("gains from
trade") as
long as the
world terms
of trade do
not equal its
autarkic
relative
prices is a
straightforwa
rd and
powerful
concept.
Nevertheless,
it is
impossible to
demonstrate
empirically.
Why?
A
This is
because there
is no way of
knowing
exactly what
are, or would
have been,
the autarky
MRTs or
MRSs. This is

i
s
n
o
s
i
n
g
l
e
e
x
a
m
p
l
e
i
n
t
h
e
w
o
r
l
d
o
f
36

a country
that is totally
unengaged in
international
trade.
Q
Previous
Edition

37

G
i
v
e
n

27)
Given the
information
in the table
above. What
is the
opportunity
cost of Cloth
in terms of
Widgets in
Foreign?
A
One half a
widget.

t
h
e
i
n
f
o
r
m
a
t
i
o
n

Q
Previous
Edition

28)

i
n

Given the
information
in the table
above. If
these two
countries
trade these
two goods in
the context of
the Ricardian
model of
comparative
advantage,
then what is
the lower
limit of the
world
equilibrium
price of
widgets?
A
1/2 Cloths.

t
h
e
t
a
b
l
e
a
b
o
v
e
.
I
f

Q
Previous
Edition

t
h
e
s
38

e two
countries
trade these
two goods
with each
other in
context of the
Ricardian
model of
comparative
advantage,
what is the
lower limit
for the price
of cloth?
A
One half a
widget.

p
o
s
s
i
b
i
l
i
t
i
e
s
f
r
o
n
t
i
e
r

Q
Previous
Edition

30)

i
s

Given the
information
in the table
above. What
is the
opportunity
cost of cloth
in terms of
Widgets in
Foreign?
A
2 widgets.

b
o
w
e
d
o
u
t

Q
Previous
Edition

(
c
o
n
c
a
v
e

3
Misconcept
ions About
Comparati
ve
Advantage

t
o
t
h
e

If a
production
39

origin), then
production
occurs under
conditions of

c
o
u
n
t
r
y

constant
opportunity
costs.

w
i
l
l

increasing
opportunity
costs.

i
n
c
r
e
a
s
e

decreasing
opportunity
costs.

infinite
opportunity
costs.

t
h
e

None of the
above.
A
B

e
c
o
n
o
m
i
c

Q
Previous
Edition

If the
production
possibilities
frontier of
one the trade
partners
("Country
A") is bowed
out (concave
to the origin),
then
increased
specialization
in production
by that

w
e
l
f
a
r
e
o
f
b
o
t
40

h countries.
I
f

increase the
economic
welfare of
only Country
A.

t
w
o
c
o
u
n
t
r
i
e
s

decrease the
economic
welfare of
Country A.

decrease the
economic
welfare of
Country B.

h
a
v
e

None of the
above.
A
A

i
d
e
n
t
i
c
a
l

Q
Previous
Edition

p
r
o
d
u
c
t
i
o
n
p
o
s
s
i
b
41

ility frontiers,
then trade
between
them is not
likely if

i
d
e
n
t
i
c
a
l
.

their supply
curves are
identical.

their cost
functions are
identical.

t
h
e
i
r

their demand
conditions
are identical.

c
o
s
t

their incomes
are identical.

f
u
n
c
t
i
o
n
s

None of the
above.
A
E
Q
Previous
Edition

a
r
e

If two
countries
have
identical
production
possibility
frontiers,
then trade
between
them is not
likely if

i
d
e
n
t
i
c
a
l
.

their supply
curves are
42

their demand
functions
differ.

c
o
m
p
a
r
a
t
i
v
e

their incomes
are identical.

None of the
above.
A
C

a
d
v
a
n
t
a
g
e
.

Q
Previous
Edition

If one
country's
wage level is
very high
relative to the
other's (the
relative wage
exceeding the
relative
productivity
ratios), then
if they both
use the same
currency

c
o
n
s
u
m
e
r
s

neither
country has a
comparative
advantage.

w
i
l
l
s
t
i
l
l

only the low

wage country
has a
comparative
advantage.

f
i
n
d

only the high

wage country
has a
43

trade worth
while from
their
perspective.

p
o
s
s
i
b
l
e

None of the
above.
A
E

t
h
a
t

Q
Previous
Edition

b
o
t
h

If one
country's
wage level is
very high
relative to the
other's (the
relative wage
exceeding the
relative
productivity
ratios), then

c
o
u
n
t
r
i
e
s

it is not
possible that
producers in
each will find
export
markets
profitable.

w
i
l
l
f
i
n
d

it is not
possible that
consumers in
both
countries will
enhance their
respective
welfares
through
imports.

g
a
i
n
s
f
r
o
m

it is not

t
44

rade.

e
a
c
h

it is possible
that both will
enjoy the
conventional
gains from
trade.

c
o
u
n
t
r
y

None of the
above.
A
D

e
x
p
o
r
t
i
n
g

Q
Previous
Edition

If one
country's
wage level is
very high
relative to the
other's (the
relative wage
exceeding the
relative
productivity
ratios) then it
is probable
that

t
h
e
g
o
o
d
i
n
w
h
i
c
h

free trade
will improve
both
countries'
welfare.

i
t

free trade
will result in
no trade
taking place.

e
n
j
o
y
s

free trade
will result in
45

comparative
advantage.

I
n

free trade
will result in
each country
exporting the
good in
which it
suffers the
greatest
comparative
disadvantage
.

a
t
w
o
c
o
u
n
t
r
y
,

None of the
above.
A
B

t
w
o
p
r
o
d
u
c
t

Q
Previous
Edition

w
o
r
l
d
,
t
h
e
s
t
a
t
e
m
e
n
46

t "Germany
enjoys a
comparative
advantage
over France
in autos
relative to
ships" is
equivalent to

P
r
e
v
i
o
u
s
E
d
i
t
i
o
n

France
having a
comparative
advantage
over
Germany in
ships.

I
f

France
having a
comparative
disadvantage
compared to
Germany in
autos and
ships.

t
h
e
U
n
i
t
e
d

Germany
having a
comparative
advantage
over France
in autos and
ships.

S
t
a
t
e
s
'

France
having no
comparative
advantage
over
Germany.

p
r
o
d
u
c
t
i
o
n

None of the
above.
A
A
47

possibility
frontier was
flatter to the
widget axis,
whereas
Germany's
was flatter to
the butter
axis, we
know that

f
l
a
t
t
e
r
t
o
t
h
e

the United
States has no
comparative
advantage

w
i
d
g
e
t

Germany has
a
comparative
advantage in
butter.

a
x
i
s
,

the U.S. has a

comparative
advantage in
butter.

w
h
e
r
e
a
s

Not enough
information
is given.

None of the
above.
A
B

G
e
r
m
a
n
y
'
s

Q
Previous
Edition

10)
Suppose the
United States'
production
possibility
frontier was

w
a
s
f
48

latter to the
butter axis.
We now
learn that the
German
mark sharply
depreciates
against the
U.S. dollar.
We now
know that

p
o
s
s
i
b
i
l
i
t
y
f
r
o
n
t
i
e
r

the United
States has no
comparative
advantage

Germany has
a
comparative
advantage in
butter.

w
a
s
f
l
a
t
t
e
r

the United
States has a
comparative
advantage in
butter.

Not enough
information
is given.

t
o
t
h
e

None of the
above.
A
B

w
i
d
g
e
t

Q
Previous
Edition

11)

a
x
i
s

Suppose the
United states
production
49

, whereas
Germany's
was flatter to
the butter
axis. We now
learn that the
German
wage
doubles, but
U.S. wages
do not
change at all.
We now
know that

W
h
i
c
h
o
f
t
h
e
f
o
l
l
o
w
i
n
g

the United
States has no
comparative
advantage.

Germany has
a
comparative
advantage in
butter.

s
t
a
t
e
m
e
n
t
s

the United
States has a
comparative
advantage in
butter.

i
s

Not enough
information
is given.

t
r
u
e
?

None of the
above.
A
B
Q
Previous
Edition

F
r
e
e

12)

t
50

rade is
beneficial
only if your
country is
strong
enough to
stand up to
foreign
competition.

M
a
h
a
t
m
a
G
h
a
n
d
i

Free trade is
beneficial
only if your
competitor
does not pay
unreasonably
low wages.

e
x
h
o
r
t
e
d

Free trade is
beneficial
only if both
countries
have access
to the same
technology.

h
i
s

All of the
above.

f
o
l
l
o
w
e
r
s

None of the
above.
A
E
Q
Previous
Edition

i
n
I
n
d
i
a
t
o
51

promote
economic
welfare by
decreasing
imports. This
approach

C
o
p
p
e
r
p
r
o
d
u
c
e
d

makes no
sense.

makes no
economic
sense.

(
r
e
l
a
t
i
v
e

is consistent
with the the
Ricardian
model of
comparative
advantage.

is not
consistent
with the
Ricardian
model of
comparative
advantage.

t
o
t
h
e
c
o
s
t

None of the
above.
A
D
Q
Previous
Edition

o
f
W
i
d
g
e
t
s

14)
The Country
of Rhozundia
is blessed
with rich
copper
deposits. The
cost of

p
r
52

oduced) is
therefore
very low.
From this
information
we know that

o
n
e
i
n
a
n
y

Rhozundia
has a
comparative
advantage in
Copper

o
t
h
e
r

Rhozundia
should
export
Copper and
import
Widgets

c
o
u
n
t
r
y

Rhozundia
should
export
Widgets and
export
Copper

k
n
e
w
h
o
w

Both A and B
are true.

t
o

None of the
above.
A
E

p
r
o
d
u
c
e

Q
Previous
Edition

15)
We know
that in
antiquity,
China
exported silk
because no-

t
h
i
s
p
53

roduct. From
this
information
we learn that

T
h
e
p
a
u
p
e
r

China
enjoyed a
comparative
advantage in
silk.

l
a
b
o
r

China
enjoyed an
absolute
advantage,
but not a
comparative
advantage in
silk.

t
h
e
o
r
y
,

no
comparative
advantage
exists
because
technology
was not
diffused.

a
n
d
t
h
e

China should
have
exported silk
even though
it had no
comparative
advantage.

e
x
p
l
o
i
t
a
t
i
o
n

None of the
above.
A
A
Q
Previous
Edition

a
r
g
u
m

16)
54

N
e
w

ent

are
theoretical
weaknesses
that limit the
applicability
of the
Ricardian
concept of
comparative
advantage.

I
f
l
a
b
o
r
p
r
o
d
u
c
t
i
v
i
t
i
e
s

are
theoretically
irrelevant to
the Ricardian
model, and
do not limit
its logical
cogency.

are not
relevant
because the
Ricardian
model is
based on the
labor theory
of value.

w
e
r
e
e
x
a
c
t
l
y

are not
relevant
because the
Ricardian
model allows
for different
technologies
in different
countries.

p
r
o
p
o
r
t
i

None of the
above.
A
B
Q

55

onal to wage
levels
internationall
y, this would

not negate
the logical
basis for
trade in the
Ricardian
model.

render the
Ricardian
model
theoretically
correct but
practically
useless.

negate the
logical basis
for trade in
the Ricardian
model.

negate the
applicability
of the
Ricardian
model if the
number of
products
were greater
than the
number of
trading
partners.

None of the
above.
A
A
Q
New

56

18)

c
o
m
p
a
r
a
t
i
v
e

Many
countries in
sub-Saharan
Africa have
very low
labor
productivitie
s in many
sectors, in
manufacturin
g and
agriculture.
They often
despair of
even trying
to attempt to
build their
industries
unless it is
done in an
autarkic
context,
behind
protectionist
walls because
they do not
believe they
can compete
with more
productive
industries
abroad.
Discuss this
issue in the
context of the
Ricardian
model of
comparative
advantage.
A
The
Ricardian
model of
comparative
advantage
argues that
every
country must
have a

a
d
v
a
n
t
a
g
e
i
n
s
o
m
e
p
r
o
d
u
c
t
(
a
s
s
u
m
i
n
g
t
h
e
57

re are more
products
than
countries).
However, the
Ricardian
model is not
a growth
model, and
cannot be
used to
identify
growth
nodes or
linkages.

p
o
s
s
i
b
l
y
c
o
m
p
e
t
e

Q
Previous
Edition

w
i
t
h

19)
In 1975, wage
levels in
South Korea
were roughly
5% of those
in the United
States. It is
obvious that
if the United
States had
allowed
Korean
goods to be
freely
imported
into the
United States
at that time,
this would
have caused
devastation
to the
standard of
living in the
United
States,
because no
producer in
this country
could

s
u
c
h
l
o
w
w
a
g
e
s
.
D
i
s
c
u
s
s
t
h
i
s
58

assertion in
the context of
the Ricardian
model of
comparative
advantage.
A
Regardless of
relative wage
levels, the
United States
would be
able to
provide its
populace
with a higher
standard of
living than
would be
possible
without
trade. Also,
low wages
tend to be
associated
with low
productivitie
s.

s
u
p
p
o
s
e
t
h
i
s
h
a
p
p
e
n
e
d
f
o
r
t
h
e

Q
Previous
Edition

E
a
s
t

20)
The evidence
cited in the
chapter using
the examples
of the East
Asia New
Industrializin
g Countries
suggests that
as
international
productivitie
s converge,
so do
international
wage levels.
Why do you

A
s
i
a
n
N
I
C
s
?
I
n
l
59

ight of your
answer, what
do you think
is likely to
happen to
the relative
wages
(relative to
those in the
United
States) of
China in the
coming
decade?
Explain your
reasoning.
A
Following
the logic of
the Ricardian
model of
comparative
advantage,
the East
Asian
countries
played to
their
respective
comparative
advantages.
This allowed
the world
demand to
provide
excess
demands for
their
relatively
abundant
labor, which
in turn
tended to
raise these
wages. If
China
follows the
same pattern,
their wages
levels should
also be

e
x
p
e
c
t
e
d
o
v
e
r
t
i
m
e
t
o
c
o
n
v
e
r
g
e
t
o
t
h
o
s
e
i
n
t
h
e
i
r
i
n
60

dustrialized
country
markets.

f
u
l
l

Q
Previous
Edition

s
p
e
c
i
a
l
i
z
a
t
i
o
n

3
Comparati
ve
Advantage
with Many
Goods

The multigood (2country)

model differs
from the two
country, two
product
model, in
that in the
former,

i
s
l
e
s
s
l
i
k
e
l
y

the relative
wage ratio
will
determine
the pattern of
trade ( which
good is
exported by
which
country.

t
o
h
o
l
d

one cannot
determine
which
country will
export which
product
given only
labor
productivity
data.

i
n
e
q
u
i
l
61

ibrium.
W
h
e
n

All of the
above.

None of the
above.
A
D

w
e
e
x
a
m
i
n
e

Q
New

t
h
e
2
G
o
o
d
2
C
o
u
n
t
r
y
v
e
r
s
i
o
n
o
f
t
62

he Ricardian
model of
comparative
advantage,
we note that
comparative
advantage is
totally
determined
by physical
productivity
ratios.
Changes in
wage rates in
either
country
cannot affect
these
physically
determined
comparative
advantages,
and hence
cannot affect,
which
product will
be exported
by which
country.
However,
when more
than 2 goods
are added to
the model
(still with 2
countries),
changes in
wage rates in
one or the
other country
can in fact
determine
which good
or goods
each of the
countries will
export. How
can you
explain this
anomaly?
A

T
h
i
s
i
s
n
o
t
r
e
a
l
l
y
a
n
a
n
o
m
a
l
y
.
A
s
l
o
n
g
a
s
o
n
l
y
t
w
o
63

goods exist,
then as long
as trade takes
place, each
country must
have a
comparative
advantage in
one of them
(or none).
However, if
there are
more goods
than
countries,
then the
physical
productivity
definition of
comparative
advantage
becomes
ambiguous.
Changes in
relative wage
rates will
shift the
international
competitiven
ess along the
"chain of
comparative
advantage."

W
i
d
g
e
t
s
i
n
a
R
i
c
a
r
d
i
a
n
2
X
2
m
o
d
e
l

Q
Previous
Edition

i
n
w
h
i
c
h

3
Adding
Transport
Costs and
Nontraded
Goods

C
o
u
n
t
r
y

If
transportatio
n costs are
especially
high for

A
64

enjoys a
comparative
advantage,
then

q
u
e
s
t
i
o
n
s

Country B
must also
enjoy a
comparative
advantage in
Widgets.

f
o
r

Country B
may end up
exporting
Widgets.

t
h
i
s

Country A
may switch
to having a
comparative
advantage in
the other
good.

s
e
c
t
i
o
n
.

T
R
U
E

All of the
above.

None of the
above.
A
E

N
e
w

Q
Previous
Edition

3
Empirical
Evidence
on the
Ricardian
Model

There are no
65