According to the Wall Street Journal (August 30, 2007, In the Balance), it takes about 30 hours

According to the Wall Street Journal (August 30, 2007, €œIn the Balance€), it takes about 30 hours to assemble a vehicle in the United States. Let€™s use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, €œNorth€ is shorthand for the high-tech developed countries of East Asia, North America, and Western Europe, while €œSouth€ is shorthand for the rest of the world. Let€™s use that shorthand here.
a. Consider the following productivity table: Which region has an absolute advantage at making high-quality cars? And low-quality cars?

b. Using the information in the productivity table, estimate the opportunity cost of making high- or low-quality cars in the North and in the South. Which region has a comparative advantage (i.e., lowest opportunity cost) for manufacturing high-quality cars? For low-quality cars?

c. One million hours of labor are available for making cars in the North, and another 1 million hours of labor are available for making cars in the South. In a no-trade world, let€™s assume that two-thirds of the auto industry labor in each region is used to make high-quality cars and one-third is used to make low-quality cars. Solve for how many of each kind of car will be produced in North and South, and add up to determine total global output of each type of car. (Why will both kinds of cars be made? Because the low-quality cars will be less expensive.)

d. Now allow specialization. If each region completely specializes in the type of car in which it holds the comparative advantage, what will global output of high-quality cars be? Of low-quality cars? In the following table, report your answers. Is global output in each kind of car higher than before?

Transcribed Image Text:

Number of Hours to Make One High-Quality Car 30 60 Number of Hours to Make One Low-Quality Car 20 30 North South Opportunity Cost of Opportunity Cost of Making One High-Quality Car Making One Low-Quality Car high-quality cars high-quality cars North low-quality cars Southlow-quality cars Output of High-Quality Cars Output of Low-Quality Cars North South Global output Output of Output of High-Quality Cars Low-Quality Cars North South Global output