Alejandra Nozal and Helena Montero
Group 8
INTERNATIONAL ECONOMICS: INTEGRATION
PROBLEM SET 2
1 - Mytown (M) and Yourtown (Y) have just opened their borders to free trade. Mytown is exporting
Laptops (L) while Yourtown exports Food (F) , then it MUST be the case that the labor requirements
MUST satisfy (where ai,c represents the labor requirements in country c in order to produce one unit of
good i.
a) aM,L > aY,L . INCORRECT: The fact that M exports laptops does not mean that it has a higher labor
requirement nor a comparative advantage/disadvantage.
b) aM,L < aY,L. INCORRECT: Same reasoning as in A. The fact that Y exports food does not mean that it
has a higher labor requirement for laptops nor a comparative advantage/disadvantage.
c) aM,F > aY,F . INCORRECT: Y exports food thus it could mean that Y has an absolute advantage in food,
which
d) aM,L/aY,L < aM,F /aY,F . CORRECT: In this equation we are contrasting the amount of labor required to
produce L by M with the amount of labor required to produce L by Y. So we can assume that M is an
expert in the production of L and Y in the production of F.
2 - Northon (N) and Southon (S) have just opened their borders to free trade. Two goods are produced:
mobile phones (m) and champagne (c). The labor requirements are such that aN,m = 2aS,m and aN,c = 4aS,c
(where ai,g represents the labor requirements in country i in order to produce one unit of the good (g).
From the provided data we can deduct that:
Given the data, Norton has an ABSOLUTE DISADVANTAGE in both goods because both labor
requirement are higher. However, it has a comparative advantage in the production of mobile phones
because compared with Southon is only 2 times worse in producing phones while it is 4 times worse in
the production of champagne.
Regarding Southon, it has an ABS ADVANTAGE in both goods. However, it has a comparative
advantage in the production of champagne.
1. a) Norton has an absolute advantage in the production of champagne and a comparative
disadvantage in the production champagne. INCORRECT
2. b) Norton has an absolute disadvantage in the production of Mobile Phones and a
comparative advantage in mobile phones. CORRECT
3. c) Southon has an absolute advantage in both goods and has a comparative advantage in mobile
phones. INCORRECT
4. d) None of the other. INCORRECT
Alejandra Nozal and Helena Montero
Group 8
3. Build a numerical example with two goods (different than the one presented in the Magistral session),
where you can prove that a country that is more productive in both commodities can still benefit from
trading with a country that is less productive in all sectors. HINT: Compensate with more workers the
country with the worst technology (next session you will understand why is necessary to do this).
Nº of workers needed to produce 100 units of both goods
Candles Lighters
A town 50 40
H town 10 20
H has an absolute advantage in both goods
A has an absolute disadvantage in both goods. However, it has comparative advantage in
Lighters, because while it is 5 times worse in producing candles, it is just 2 times worse in
producing lighters.
Hence, if H specializes in producing candles ( because of the comparative advantage) and buys
lighters from A ( who specializes in lighters because of the comparative advantage) then will
both benefit from the trade.
4–
i) A country should export the goods with low production costs and import the goods with high domestic
production costs. Is this statement true or false? (justify your answer).
This statement is true as long as importing the goods with high domestic production costs is cheaper than
producing them in your country with high production costs.
ii) Many people (many well known politicians among them) believe that free trade is beneficial only if a
country is strong enough to withstand foreign competition. Do you agree with this statement?
This is one of the misconceptions about comparative advantage: this arguments fails to recognize that
trade is based on comparative advantage not absolute advantage.