Trade Problem Set 40 2-1




1. Use the information in the table to answer the following questions.

Beer Pizza
Italian labor productivity 6 bottles/hour 6 pizzas/hour
German labor productivity 5 bottles/hour 3 pizzas/hour

A. Which country has the absolute advantage in beer? ... in pizza? Explain why.

B. Explain why Italy's comparative advantage good is the one it can produce "most-best,", while Germany's comparative advantage good is the one it can produce "least-worse."

C. What autarky price ratios (PB/PP) would prevail in each country? Explain.

D. Explain how price differences signal the expansion and export of a country's comparative advantage goods and the contraction and import of a country's comparative disadvantaged goods.

E. What does the model suggest will happen to employment levels in the export and import industries? In the model what happens to the overall level of unemployment in the economy after a country moves to free trade? Explain briefly.

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Last Updated on 7/18/06