Question

The following table shows the amount of textile and auto one unit of labor can produce...

The following table shows the amount of textile and auto one unit of labor can produce in Mexico and the United States.

Textile

Auto

Mexico

12

2

United States

16

4
  • In Mexico, what are the marginal products of labor in textile and auto production, respectively? In the United States, what are the marginal products of labor in textile and auto production, respectively?
  • Which country has an absolute advantage in textile and which country has an absolute advantage in auto?
  • What is the autarkic price ratio of auto relative to textile in each country?
  • Which country has a comparative advantage in textile and which country has a comparative advantage in auto?
  • Suppose Mexico has 1,000 labor units available. Construct the production-possibilities frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for Mexico.
  • Suppose the international price is set at 1 auto:5 textile and Mexico decides to completely specialize at producing the product in which it has a comparative advantage. How would the above graph change? Use the graph to show the gains from trade and the export and import quantities. For each unit of its import good, how much is Mexico’ gain (measured in terms of the other good)?
  • At what level of international price ratio will all the benefits from trade accrue to Mexico? Use the above graph to show Mexico’s total gains from trade in this case.
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