Question

Specialization in international trade- based on Ricardo’s Theory: Given that two nations have equal resources and both nations agree to specialize in the production of a product that is most efficient, determine: a)Specialization between the two nations (which nation specializes in which product?) b)The range of terms of trade (trade negotiation terms) c)The best of terms of trade (democratic distribution of trade benefit) d)The net benefit for each country (after specialization) e)Discuss the limitations of production and export based on such assumption in the current global economy Use the following data to answer the above questions.

Before specialization:

Products/Country	Japan	U.S
Auto	10	10
Plane	5	10

Answer 1

Japan specializes in auto, while US specializes in planes.

Reason: Based on the information provided in the above table, US is four times more efficient than Japan in planes production, while US is less inefficient in the production of planes than in the production of auto

The range of terms of trade

a. If the trade in Japan during pre-specialization is: 10 A = 5P, then P=2A

b. If the trade in US during pre-specialization is: P = A Therefore, both of them will benefit from specialization and trade if the value of P = A to 2A

C. Therefore the best terms of trade is P = (A + 2A)/2; P = 1.5A

d) The net benefit for:

a. Japan in specializing wine: Given that c=1.5w, how much wine does Japan need to give up in order to retrieve the lost consumption of 5 Planes? Solution: If P = 1.5A 5P= ?A That is; 5*1.5A=7.5A Therefore the net benefit for Japan will be: 20A-(7.5A+10A) = 2.5A

b. US is expected to produce clothes: Given that P=1.5A, how much clothes does US need to give up in order to retrieve the lost consumption of 20 auto? Solution: If P = 1.5A ?P = 20A That is; 20/1.5P=13.33P Therefore the net benefit for US is 40P- (13.33P + 20P) = 6.67P

e) Limitation of production and export

• There are more than two countries and two products in current global economy.

• Labors are not the only one factor of production.

• Countries are with different technology levels.

• The assumption does not consider the quality of production.

• It is hard to measure what is other countries’ specialization in current global economy.

• Different countries may obtain different amount of resources