Question

Please answer ALL of the questions below:

1. Suppose China and Japan produce only two goods A and B, and the relative price of A to B in China is lower than that in Japan without trade between the two economies. Then, China can be said to have a comparative advantage in producing the good (a. A/ b. B), and Chinese relative productivity in good A is (a. higher/ b. lower) than that of Japan.

2. According to the Ricardian model of international trade, an economy tends to export a good whose relative price (a. goes up/ b. remain the same/ c. goes down) when joining international trade. International trade benefits a country (a. only/ b. partly) because it can specialize more in producing a good with comparative advantage.

3. Trade is beneficial (a. if/ b. only if/ c. whether or not) a country has high international competitiveness in production. The more competitive a country is in the world, the (a. higher/ b. lower) is its wage level.

4. Suppose Chinese labor productivities in two goods, i.e. automobile and computer chips are 15% and 50% of those of the US, respectively. Then, the theory of comparative advantage tells us that China tends to import (a. automobile/ b. computer chips) from the US and that the Chinese wage level is (a. higher/ b. lower/ c. either higher or lower) than that of the US.

5. Suppose that Japan is better at producing high-technology goods than low-technology goods, and that labor is immobile and only capital is mobile between sectors. Then, a rise in the price of the high-technology goods in the world will always benefit (a. unskilled labor/ b. skilled labor/ c. capital owner) in Japan and (a. unskilled labor/ b. skilled labor/ c. capital owner) in the rest of the world.

Answer 1

The correct answers are marked in bold and underlined. Wherever explanation is needed, it is provided.

1. Suppose China and Japan produce only two goods A and B, and the relative price of A to B in China is lower than that in Japan without trade between the two economies. Then, China can be said to have a comparative advantage in producing the good a. A, and Chinese relative productivity in good A is a. higher than that of Japan.

Explanation: When trade happens as per the Ricardian principle, a country specialises in and exports the commodity which it can produce compartively cheaper than the other.

2. According to the Ricardian model of international trade, an economy tends to export a good whose relative price a. goes up when joining international trade. International trade benefits a country b. partly because it can specialize more in producing a good with comparative advantage.

Explanation: As specified previously, when trade happens as per the Ricardian principle, a country specialises in and exports the commodity which it can produce compartively cheaper than the other. Thanks to trade, this country gets a better (higher) price for this commodity, and in addition to that it also gets a better (lower) price for the commodity that it could domestically produce expensively.

3. Trade is beneficial c. whether or not a country has high international competitiveness in production. The more competitive a country is in the world, the b. lower is its wage level.

Explanation: Ricardian theory showed that even if a country does not have an absolute advantage in the production of any single good (showing that it does not have high international competitiveness), the rationale for trade still exists because there will be some good in which it has the least comparative disadvantage. Further, wage level is inversely related with competitivess. This is because when wages are low, a good can be produced cheaper.

4. Suppose Chinese labor productivities in two goods, i.e. automobile and computer chips are 15% and 50% of those of the US, respectively. Then, the theory of comparative advantage tells us that China tends to import b. computer chips from the US and that the Chinese wage level is c. either higher or lower than that of the US.

Explanation: China has an absolute disadvantage in both commodities. But its disadvantage is lesser in case of computer chips in comparison to automobiles. But this does not tell us anything about the wage levels in the two countries.

5. Suppose that Japan is better at producing high-technology goods than low-technology goods, and that labor is immobile and only capital is mobile between sectors. Then, a rise in the price of the high-technology goods in the world will always benefit c. capital owner in Japan and a. unskilled labor/ b. skilled labor in the rest of the world.

Explanation: If there is a rise in prices of high-technology goods, capital owners will benefit much more than the other two classes, as high-technology goods are generally capital-intensive. So returns to capital owners will rise. But it's ambiguous what will be the impact on factors of production in the rest of the world, as whether trade is taking place or not is not specified.