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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.

a. For this situation, construct a table analogous to the table in Figure 1.

b. Graph the production possibilities frontiers for the American and Japanese economies.

c. For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1.

d. Which country has an absolute advantage in producing cars? In producing grain?

e. Which country has a comparative advantage in producing cars? In producing grain?

f. Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce?

g. Starting from a position without trade, give an example in which trade makes each country better off.

Subpart (a):

To determine
Calculate the member of required labor.

Explanation

Number of workers required to produce one unit of goods can be calculated using the following formula.

Required labor=1Total production per person (1)

Substitute the respective values in Equation (1) to calculate the required number of person to produce one unit of car in U.S.

Required labor=14=0.25

Required labor to produce one unit of car in U

Subpart (b):

To determine
Draw the production possibility frontier.

Subpart (c):

To determine
Calculate the opportunity cost.

Subpart (d):

To determine
Find the country that has absolute advantage in the production of goods.

Subpart (e):

To determine
Find the country that has absolute advantage in the production of goods.

Subpart (f):

To determine
Calculate the total production before the trade.

Subpart (g):

To determine
Gains from trade for the U.S. and Japan.

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