Chapter 2: Gains from Trade. Keith Head Sauder School of Business. Objectives of this chapter. Illustrate the gains from trade based on exploiting comparative advantage Show how productivity, wages, competitive advantage, and exchange rates relate to each other.
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Sauder School of Business
Lu= 300, Ls = 150, output = 3000
Lu= 225 Ls = 75, output = 3375
6375/750 = 8.5 shoes per worker
Lu = 150 2250 U, Ls =150 6750S
Productivity: 9 shoes per worker
Lu = 150 1500 U, Ls=300 6000 S
Productivity: 6000/750 = 8 shoes/worker
(6750-6375)/6375 = .06
If wages were equal, Korea’s factory would be the low cost source for both uppers and soles. (Why? AA)
Draw the Korean relative wage line.
WK = wages in Korea (won/worker)
WT= wages in Thailand (baht/worker)
e = exchange rate (baht/won)
1.5 <eWk/Wt <2.25
1.5 <e (1/2) <2.25
Plan C (full specialization KU and TS) is just as good (2700 shoes) as plan B