INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 2
1. “China’s wage rate is one tenth of the E.U. wage rate. Therefore, the E.U. will be
unable to compete in the Chinese market.”
“China is far behind E.U. levels of productivity and has an absolute disadvantage in all
goods compared to E.U. firms. Therefore, E.U. firms currently are safe from Chinese
competition.”
These two statements indicate confusion over Ricardo’s principle of comparative
advantage. Based on that principle, correct each statement and convert it into an
accurate characterization of the competitive positions of E.U. and Chinese producers,
paying particular attention to the distinction between the competitiveness of producers
in an industry versus the competitiveness of an entire economy.
2. French output per worker in electronic assembly is 20 computers per hour, while in
Indonesia it is 4 computers per hour. If output per worker in the French bicycle industry
is 10 bicycles per hour, what range of productivity values for the Indonesian bicycle
industry must exist for Indonesia to have a comparative advantage in assembling
computers? . . . for France to have an absolute advantage in bicycle production?
3. Assume a classical world of two goods and two countries where labor is the only input.
The amount of labor required per ton of output in the production of sugar and coffee for
Countries A and B is given in the table below.
Country Sugar Coffee
A 16 8
B 10 20
a. Explain the pattern of comparative advantage that exists, and calculate the cost of
coffee in each country.
b. Suppose 20 individuals in B shift from producing coffee to producing sugar, and
they are able to sell that sugar at A’s domestic price ratio. How much more coffee
would B gain compared to the amount of coffee those 20 individuals initially
produced in B?
c. If B is much smaller than A, why is B more likely to experience a large gain from
trade?
4. Again, assume a classical world of two goods and two countries where labor is the o
input, but consider the relevant labor productivity information in a slightly different form.
The table below shows what outputs of cloth and wheat one day of labor will produc
Inlandia and Outlandia.
nly
e in
Country Cloth (square meters) Wheat (kilograms)
Inlandia 20 30
Outlandia 4 5
a. What pattern of comparative advantage exists?
b. Outlandia has an absolute disadvantage in each good. Nevertheless, it can still gain
from trade. If the equilibrium exchange ratio is 1.4 kilograms of wheat per 1 square
meter of cloth, explain how Outlandia gains from trade.
c. Why are demand factors important in determining equilibrium trading prices even
under the labor theory of value? If there is a worldwide increase in demand for cloth
due to rising fashion consciousness on university campuses, how will that affect
wages and the gains from trade in Inlandia and Outlandia?
d. If Outlandia discovers a new way of producing wheat and its labor productivity rises
to 6 kilograms per day, how does that affect the potential gains from trade?
5. Why is a small country likely to export a lot of a few goods but import a little of many
goods? What role do constant costs play in your explanation? Given the kinked supply
curves that apply in the classical world, on what segment of the curve will the economy
be operating when it trades internationally?
6. Suppose labor is the only cost of production and labor productivities (output per unit of
labor input) in Japan and India are as follows:
Country Nails (kg) Oranges (kg) Rice (kg)
Japan 10 10 30
India 1 2 5
a. If these are the only two nations who trade, and consumers in both countries
demand all three goods (the only ones that are available), explain what you can
conclude about the comparative advantage of each country.
b. Within what limits must the ratio of Japanese wages to Indian wages settle when
trade is possible? If that ratio turns out to be 5.5, what goods will each country
export and import?
7. Use the labor productivity information in the problem above to consider the role that
transportation costs play in determining what Japan and India will trade. Suppose it
takes 0.04 units of labor to transport a kilogram of any of the goods in either direction.
(Consequently, the cost of Japan supplying nails to India becomes 0.1 units of labor to
produce a kilo of nails plus 0.04 units of labor to transport them, while Indian costs of
serving the domestic market remain 1.0 unit of labor.)
a. Explain whether India now has an incentive to become self-sufficient in nail
production (nails become a nontraded good) or whether India will still choose to
import nails from Japan.
b. Determine how this transportation cost affects trade in oranges and rice. Why does
this additional cost make a bigger difference to the relative cost of rice than oranges
in international trade?
INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 2: Answers
1. Ricardo’s insight was that a basis for trade would depend upon relative
costs of production in each country, where the cost of expanding output of
one good was measured in terms of how much of the other good must be
given up. While absolute levels of productivity are important in
2. French productivity is 5 times greater than Indonesian productivity in
electronic assembly. For Indonesia to have a comparative advantage in
3. a. The cost of coffee in A is ½ ton of sugar per ton of coffee, and in B it is
2 tons of sugar per ton of coffee, as given by the ratio of labor input
requirements. A has a comparative advantage in coffee production, as
well as an absolute advantage in coffee production.
4. French productivity is 5 times greater than Indonesian productivity in
electronic assembly. For Indonesia to have a comparative advantage in
5. With constant costs of production, a small country will become completely
specialized in just one good, producing as much as possible for the large
6. a) The ratio of Japan/India labor productivities in nails is 10, in oranges 5,
and in rice 6. Japan has a comparative advantage in nails and a
comparative disadvantage in oranges. Alternatively, the price of nails in
Japan is 1 orange, and in India it is 2 oranges, which demonstrates
7. a. The labor cost of Japanese nails exported to India, including the
transport charge, will be 0.14 units of labor, and the domestic labor cost in
India still will be 1 unit of labor. The ratio of required labor in Japan relative
to India no longer is 0.1, but now is 0.14, which still is less than the ratio of
