Question

Comparative advantage and import competition

Hungary recently joined the European Union (EU) and faces intense import competition from other EU members, such as Spain. Suppose you have the following data on labor productivity for apparel and wine production in Hungary and Spain. Assume that apparel and wine production 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)
Hungary	40,000	20,000
Spain	78,000	31,200

The table suggests that Spain has an absolute advantage over Hungary in__________ (both products, neither products, wine, apparel) and a comparative advantage in ____________(wine, apparel, neither products, both products).

The table suggests that wages in Hungary are_________(lower, higher, the same) as in Spain.

As a result of Hungary’s joining the EU, employment in Hungary is likely to fall in.

True or False: The degree of openness of the Hungarian economy will have a positive impact on the level of employment.

True

or

False

Answer 1

The table suggests that spain has an absolute advantage in both the products(Apparel, Wine) and conparative advantage in Apparel.

The table suggests that wages in Hungary is low. As a result, employment in Hungary is likely to fall in.

The degree of openess of Hungarian economy will have a positive impact on the level of employment FALSE because import will take place and which will impact the employment level in the economy.