Question 2

According to theWall 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 following productivity table: Which region has an absolute advantage at making high-quality cars? And low-quality cars?

Number of HourstoMake High-Quality Car

Number of Hours Make

Low-Quality Car

North

60

40

South

120

60

b.

1-Using the information in the productivity table, estimate the opportunity cost of making high- or low-quality cars in the North and in the South.

Opportunity Cost

One High-Quality Car

One Low-Quality Car

North

____low-quality Car

____high-quality Car

South

____low-quality Car

____high-quality Car

2-Which region has a comparative advantage (i.e., lowest opportunity cost) for manufacturing high-quality cars? For low-quality cars?

c.Nine millionhours of labor are available for making cars in the North, and anotherninemillion hours of labor are 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.

1-Solve for how many of each kind of car will be produced in North, and South and add up to determine total global output of each type of car.

Output of

High-Quality Car

Output of

Low-Quality Car

North

South

Global output

2-Why will both kinds of cars be made?

d.

1-Now allow specialization. If each region completely specializes(useall the nine million hours )in the type of car in which it holds the comparative advantage, what will global output of high-quality cars be? Of low-quality cars? In the following table, report your answers.

Output of

High-Quality Car

Output of

Low-Quality Car

North

South

Global output

2-Is global output in each kind of car higher than before?