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3. Use the Ricardian trade to analyze trade between two countries, Germany and Poland, each of...

3. Use the Ricardian trade to analyze trade between two countries, Germany and Poland, each of which can produce two goods, chemicals (C, measured in liters) and steel (S, measured in kilograms with labor requirements as shown in the following table:

Hours of labor per unit of output

Chemical
(in liters)

Steel
(in Kg.)

Germany

1

3

Poland

4

5

a. What would be the relative price of chemicals (Pc /Ps) in each country in autarky? In what a unit is this relative price expressed? How does this relate to the concept of “opportunity cost”? Which country has the comparative advantage in each commodity?

b. Suppose that German wages are €20 per hour (where € = euros) and Polish wages are €10 per hour (also measured in euros for convenience).   Using the formula that price = (wage × labor hours), determine whether trade based on “absolute advantage” (lowest price) will follow comparative advantage.   Does Poland get an overall competitive advantage over Germany from its lower wage? If so, in which product?

Hint: Take the above hours of labor per unit of output and convert them to prices by multiplying the wage times the labor hour. Then consider with different prices, who would export and who would import the goods.

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Homework Answers

Answer #1

A). relative price in Germany i.e. Pc/Ps= 3

relative price in Poland i.e. Pc/Ps =5/4

no unit as price/price sp $/$ cancels out

opportunity cost is equal to the relative price

Germany has comparative adavantage in steel (5/4 < 3) and in chemical (1/3 < 4/5)

Poland has no comparative advantage

B)No trade based on absolute advantage doesn't follow comparative advantage as now the scenario changes

.Yes, Poland gets an overall competitive advantage over Germany from its lower wage in Steel (50 <60)

Poland wold export Steel and Germany would export Chemicals

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