Econ 433 Problem set (2014)

2. Assume the United States and Japan are the only two countries in the world. In the U.S., four man-hours of labor are required to produce each car and each unit of wheat, while in Japan two man-hours of labor produce one car and four man-hours of labor produce one unit of wheat. Suppose also thatboth the U.S. and Japan have 60 man-hours of labor available. Suppose that everyone in the world always consumes exactly one car for each unit of wheat. No other commodities exist or are needed. Consider the price of wheat relative to that of a car, that is, assume that the price of a car is unity throughout. a. (i) Explain how each owner of a unit of labor would decide what to produce in the U.S., given that the price of a unit of wheat is pw .(ii) Draw the PPF (production possibility frontier) for the U.S.. What would the production decision be if we choose production to maximize the value of output subject to the outputs being feasible, that is, lying on or below the PPF?(iii) Compare your answers to the two parts above. Do they di¤er? What does this tell you?b. Draw the PPF for Japan, and for the world under trade. Note that labor is immobile across countries under trade.c. What are the autarky relative prices in the U.S. and in Japan? Relate these to the comparative advantages of the U.S. and Japan.d. What would the U.S. and Japan produce and consume under autarky?e. Under trade, what will each country produce, and what will it export and import? What is the world relative price with trade? Who gains from trade?f. A member of the “Close America” party argues that since the Japanese are better at everything than we are we will be competed out of the market and trade will hurt us. Hence we should close trade and just rely on ourselves. Do you agree with him/her?g. Draw the world PPF assuming that labor is internationally mobile. Are their further gains from labor mobility? Explain why/why not. h. If Japan had only 20 workers, what would your answer be to g.?

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