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