Lecture 1 A

Question 1

Comparative Advantage

Answer 1

every country should specialize and produce only those products which it can produce relatively cheaper than other countries

Question 2

Empirical Implication of the Theory of Comparative Advantage

Answer 2

labor abundant countries will export labor intensive products while well-educated, human-capital intensive countries will export high tech products
EX: US exports information technology

Question 3

Absolute Advantage

Answer 3

The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service.
–> would suggest that countries should export all products/services that they have an advantage in (but don’t b/c comparative advantage)

Question 4

Where and why do you locate?

Answer 4

• global corporations producing labor-intensive products typically do not look at wages rates because they do not measure true labor costs
• some countries have low wages but low productivity

Question 5

Unit Labor Costs

Answer 5

= wage rate per hour / hourly wage productivity
= ($/hour) / (output/hr) = ($/output)
- help determine where to locate labor-intensive production abroad
- a country’s comparative advantage in exporting is inversely related to unit labor costs