In 1990, the ratio of Japanese to US labor productivity in the steel and consume

Question

In 1990, the ratio of Japanese to US labor productivity in the steel and consumer electronics industries were estimated to approximately 1.4 and 1.12. We will assume that (a) these are the only two industries and labor is the only factor of production; (b) both industries are characterized by perfect competition, (c) there are no trade restrictions, and (d) that both countries specialize.

a. What country has the comparative advantage in producing steel and what country has
the comparative advantage in producing electronics? What can you say about the
absolute advantage between the two countries?
b. Based on this info what can you say about the ratio of real-wages (measured in terms
of steel and electronics) between Japanese and US workers in 1990?

Explanation / Answer

Labor productivity = Total units produced / Total man-hours worked by labors

The presentations of ratios are given below:

Ratio of labor productivity between J and US in steel = 1.4 : 1

Ratio of labor productivity between J and US in electronics = 1.2 : 1

These ratios are based on following constraints:

1. Labor is the only factor of production of steel and electronics.

2. The market of steel and electronics are perfectly competitive.

3. The two countries do trade freely without any restriction.

4. Both the countries have specialization.

Based on the above data, J’s productivity for both steel and electronics are higher than the US.

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