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 n umbers to sum up the global division of labor in auto manufacturing. In international e conomics, “North” is shorthand for the hightech developed c ountries of East Asia, North America, and Western E urope, 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 lowquality cars? 589

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?

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.)

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.)

Transcribed Image Text:

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