Question

Suppose there are two countries, USA and Japan. USA is regarded as the home country and Japan is the foreign country. USA has 100 units of labor available and Japan has 80 units of labor. Both countries can produce only two goods, airplanes and cars. The output per hour of labor in the production of airplanes in the USA is 12, while in car production the output per hour of labor is 6. In Japan, the output per hour of labor in the production of airplanes is 2 and the output per hour of labor in the production of cars is 2. Using the Ricardian model,

1. Construct a graph of the United States production possibility frontier (use the vertical axis to represent airplanes and the horizontal axis to represent cars).
2. Construct a graph of Japan’s production possibility frontier.
3. Suppose the mutually beneficial terms of trade between USA and Japan is 1 airplane for ¾ car, draw the consumption possibility frontier for USA by superimposing it on the graph you constructed in (a) above.
4. Using the inverse of the marginal product of labor, construct a table of the unit labor requirement?
5. Derive the opportunity cost for both USA and Japan for both goods using the unit labor requirement table that you obtained in (c) above.
6. Based on your results, determine which country should export airplane or cars.

Answer 1

a&b,c): .As it is given in fig (a). as below USA can produce 1200 aeroplane as its product of labour per hour is 12 aeroplane .It is given that 12 units of aeroplane is produced..Number of cars reduced per unit of labour is six .Therefore USA can produce 1200 aerplane and 600 cars with the given units of labour.Similarly it is given japan can produce 2 cars and 2 aeroplane per unit of labour ie with 80 units of labour can produce 160 cars and 160 aeroplane.After the trade the USA can get 900 cars with 1200 aeroplane as it is shown in the figure.In the figure b japan can get 355 aeroplane with 160 cars .In the figures a and b OQ1 shows the benefit in trade in USA by increasing 600 to 900 cars.In japan benefit of trade can be seen as OA1 .It can 355 aeroplanes with 160 cars