Question

Bulgaria recently joined the European Union (EU) and faces intense import competition from other EU members, such as Greece. Suppose have the following data on labor productivity for apparel and wine production in Bulgaria and Greece. Assume that apparel and wine produ are measured in constant dollars reflecting the value of the products. Use the Ricardian model to analyze possible effects on each country's apparel and wine industries when answering the questions that follow. Country Sales per Employee Apparel Wine (Dollars per year) (Dollars per year) 40,000 32,000 84,000 33,600 Bulgaria Greece The table suggests that Greece has an absolute advantage over Bulgaria in and a comparative advantage in The table suggests that wages in Bulgaria are in Greece. As a result of Bulgaria's joining the EU, employment in Bulgaria is likely to fall in True or False: The degree of openness of the Bulgarian economy will have a positive impact on the level of employment. O True False

Answer 1

• Greece has absolute advantage in Apparel & Wine : both goods

• comparative advantage in apparel

Opportunity Cost of wine in Bulgaria = 40,000/32,000 = 1.25 apparel

In Greece , OC = 84,000/33,600 = 2.5 apparel

So Bulgaria has Comparative ADVANTAGE in wine

& Greece has Comparative ADVANTAGE in Apparel

• wages in Bulgaria are lower than in Greece

( Bcoz a country having a absolute advantage in a good , will have higher wages )

• employment is likely to fall in apparel

(Bcoz after joining EU, Bulgaria will specialize in Wine ( in which it has Comparative ADVANTAGE) , so lower employement will be in other good production

• true

as employement in Apparel will fall but will rise in wine