9781118041581

labor cost per bottle is ¥500, or $5.00 after dividing by the exchange rate of

¥100 per dollar. Similarly, its cost per digital watch is ¥1,250, or $12.50. Table 6.2b

lists these conversions.

Table 6.2 conveys a specific message about the countries’ relative costs for

the goods. The United States has a unit labor cost advantage in producing phar-

maceuticals ($3.75 compared to $5), whereas Japan has an advantage produc-

ing watches ($12.50 compared to $15). Thus, one would envision the United

States specializing in pharmaceuticals and Japan in digital watches. The pre-

dicted pattern of trade would have the United States exporting the former

product and importing the latter from Japan. Indeed, actual trade flows in the

1990s between the two countries displayed exactly this pattern.

Table 6.2 also carries a general message: Productivity matters, but it is not

the only thing that matters. After all, according to the table, the United States

has an absolute productivity advantage in both goods. Yet Japan turns out to

have a cost advantage in watches. The cost edge materializes because Japan has

a comparative advantagein watches. That is, Japan’s productivity disadvantage

is much smaller in watches (where it is 80 percent as productive as the United

States) than in pharmaceuticals (where it is only 50 percent as productive).

After taking into account its lower wage rate, Japan indeed is the lower-cost

watch producer.

Let us emphasize the point: Besides productivity, the countries’ relative

wages and the prevailing exchange rate also matter. For instance, if U.S. wages

increased more rapidly than Japanese wages over the coming year, the U.S. cost

advantage in pharmaceuticals would narrow and Japan’s cost advantage in

watches would widen. Alternatively, suppose productivities and wages were

unchanged in the two countries, but the exchange rate changed over the year.

For instance, suppose the value of the dollar rose to ¥125 per dollar. (We say

that the dollar has appreciated or, equivalently, that the yen has depreciated.)

246 Chapter 6 Cost Analysis

TABLE 6.2

Relative Costs in the

United States and

Japan

a. Productivity

Pharmaceuticals Digital Watches

United States 4 per hour 1 per hour

Japan 2. 8

b. Costs

Pharmaceuticals Digital Watches

United States $3.75 per bottle $15 per watch

Japan $5.00 $12.50

(¥500) (¥1,250)

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