Suppose that the U.S and Japan are two Ricardian economies

| November 24, 2016

Please answer the following two problems:

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?

2. The U.S. market for computers is dominated by domestic firms such as Dell, Hewlett-Packard, and Apple. The U.S. market for consumer electronics is dominated by Japanese firms and brands such as Sony, JVC, Panasonic, Mitsubishi, and Toshiba. However, the U.S. automobile market includes both strong domestic firms like Ford and General Motors and formidable Japanese competitors like Toyota and Honda.

e. Analyze each of the above mentioned industry from the standpoint of each country-based and firm-based theory of international trade discussed in this chapter. Which theory is the best predictor and which is the worst predictor of reality for these industries?

f. Do the same theories work as well in making predictions for those industries?

g. Based on what you know about the Japanese market, decide whether the same pattern of competitiveness that exists in the United States for the computer, consumer electronics, and automobile industries also holds true for that market. Why or why not?

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