Question

Consider a 2-good 2-country Ricardian model of trade where labour productivity differences are due to different levels of “institutions”. The 2 goods are airplanes and frozen chicken and the 2 countries Japan and Mozambique. The unit labour requirements are given in the table below.

2. Institutions as a source of comparative advantage Consider a 2-good 2-country Ricardian model of trade where labour productivity differences are due to different levels of "institutions". The 2 goods are airplanes and frozen chicken and the 2 countries Japan and Mozambique. The unit labour requirements are given in the table below. Japan Mozambique Airplane | a,-4 Frozen a-2 ao -10 ac 4 a. Give one reason why "institutions" may affect labour productivity differently for the 2 goods. Which country has a comparative advantage in frozen chicken? Explain which steps you take to find this answer Assume Japan has a labour force of 1000. Draw its production possibility frontier. Let's say Japan is in autarky and consumes 100 airplanes and 300 chickens. Could it do any better than this without opening up to trade? Can Japan gain from trade with Mozambique? Show it graphically. b. c. d. e.

Answer 1

a. The institution affect labor productivity differently because the it depends on the amount of capital required against each labor for different goods

b; Japan has comparative advantage in producing frozen chicken because it need 2 unit of input to produce 1 frozen chicken whereas Mozambiq needs 4 unit of input to produce 1 unit of frozen chicken