1.5. According to the Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high tech developed countries of East Asia, North America, and Western Europe, while "South"

is shorthand for the rest of the world. Let's use that shorthand here.

a. Consider the productivity table below:

Which region has an absolute advantage at making high-quality cars? And low quality cars?

North South Number of Hours to Make One High-Quality Car 30 60 Number of Hours to Make One Low-Quality Car 20 30

b. Using the information in the productivity table above, estimate the opportunity cost of making high- or low-quality cars in the North and in the South. Which region has a comparative advantage (i.e., lowest opportunity cost) for manufacturing high-quality cars? For low-quality cars?

Opportunity Cost of Making One High-Quality Car North __ low-quality cars South __ low-quality cars Opportunity Cost of Making One Low-Quality Car __ high-quality cars __ high-quality cars

c. There are 1 million hours of labor available for making cars in the North, and another 1 million hours of labor available for making cars in the South. In a no-trade world, let's assume that two-thirds of the auto industry labor in each region is used to make high-quality cars and one-third is used to make low-quality cars. Solve for how many of each kind of car will be produced in the North and South, and add up to determine the total global output of each type of car. (Why will both kinds of cars be made? Because the low-quality cars will be less expensive.)

Output of High-Quality Cars North South Global output Output of Low-Quality Cars

d. Now, allow specialization. If each region completely specializes in the type of car in which it holds the comparative advantage, what will the global output of high-quality cars be? Of low-quality cars? In the table below, report your answers. Is global output in each kind of car higher than before? (We'll solve a problem with the final step of trade in the Thinking and Problem Solving section.)

Output of High-Quality Cars North South Global output Output of Low-Quality Cars