Question

5. Japanese labor productivity is on average about the same as that of the United States in the manufacturing sector (higher in some industries, lower in others). On the other hand, the United States is considerably more productive in the service sector than Japan. Unfortunately, most services are nontraded. American comparative advantage lies in things that they cannot sell to Japan. Some analysts have argued that this poses a disadvantage for the United States. There are two types of arguments: (1) As the US has comparative advantage in the goods that it cannot sell to Japan, the US cannot gain from trade with Japan. On the other hand Japan’s comparative advantage lies in goods that are tradable, which it can sell to the US and gains from trade. Therefore it is a disadvantage for the US (compared with Japan). (2) Since the US cannot sell things produced from sectors in which it has greatest comparative advantage (services in this case), the US has to sell other goods to the Japan, in which it has less comparative advantage, and therefore it is a disadvantage for the US (compared with Japan). You can interpret “disadvantage for the US” to be “negative impact on average American living standard”. a. Do you agree with argument (1)? Why? b. Do you agree with argument (2)? Why? c. What is the implication of this difference in productivity patterns on the relative living standard of the US to that of Japan?

5. Japanese labor productivity is on average about the same as that of the United States in the manufacturing sector (higher in some industries, lower in others). On the other hand, the United States is considerably more productive in the service sector than Japan. Unfortunately, most services are nontraded. American comparative advantage lies in things that they cannot sell to Japan. Some analysts have argued that this poses a disadvantage for the United States. There are two types of arguments: (1) As the US has comparative advantage in the goods that it cannot sell to Japan, the US cannot gain from trade with Japan. On the other hand Japan's comparative advantage lies in goods that are tradable, which it can sell to the US and gains from trade. Therefore it is a disadvantage for the US (compared with Japan). (2) Since the US cannot sell things produced from sectors in which it has greatest comparative advantage services in this case), the US has to sell other goods to the Japan, in which it has less comparative advantage, and therefore it is a disadvantage for the US (compared with Japan). You can interpret “disadvantage for the US” to be "negative impact on average American living standard”. a. Do you agree with argument (1)? Why? b. Do you agree with argument (2)? Why? c. What is the implication of this difference in productivity patterns on the relative living standard of the US to that of Japan?

Answer 1

a. no it is not a complete disadvantage. because the USA is still getting the stuff at a lower price in which Japan has a comparative advantage. hence the US is still saving some cost here. though not optimal, still we cannot say that the USA is losing in terms of living standard.

b. yes compared to Japan USA is in a disadvantage. because of

i. Japan is selling the products they have a comparative advantage but is the US is not.

ii. Japan is buying something they have disadvantage on(from US) at a lower price(otherwise they won't buy) hence Japan is winning in this regard but US again is losing by not trading the most advantageous products.

c. this means that Japan's gain in the living standard will go up more rapidly than the US. why?

because Japan is selling something they have a comparative advantage on and buying something they have disadvantage on but USA is not being able to sell their product with their own comparative advantage.

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