748 Chapter 17 Linear Programming
AB CD EFG HIJK
1
2 Trade & Comparative Advantage
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4 United States Japan
5 Watches Drugs Watches Drugs
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7 Value 22 5 Value 1,600 800
8 Cost 15 3.75 Cost 1,250 500
9 Output 2 2 Output 1 1
10 Consumption 2 2 Consumption 1 1
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12 EX/IM 0 0
13 Trade Price 12.50 3.75
14 Trade Balance 0.0 0.0
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16 Income: 45 Income: 2,500
17 Global Value Expenditure: 37.5 Expenditure: 1,750
18 78.00 Total Value: 54.0 Total Value: 2,400
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Using your spreadsheet’s optimizer, find the optimal pattern of
global production and trade to maximize cell B18. Do the countries
specialize according to comparative advantage? What is the direction of
trade for each good? Explain. Hints:(1) Include cells C12 and D12 as
changeable cells. For instance, if cell C12 were to have the value 1.5,
this means that the United States is importing1.5 billion watches from
Japan, leading to a ( 1.50)( 12.50) $18.75 billion trade balance,
that is, a trade deficit in watches (cell C14). The requirement of
balanced trade means that a deficit in one good must be matched by an
equal surplus in the other. So in this instance, the United States would
need to export 18.75/3.75 5 billion bottles of pills to be in overall
trade balance. Be sure to include the relevant trade balance constraints
in your optimizer menu. (2) Allowing for trade, each country’s total
value (cell E18 or cell J18) now depends on its consumptionof each
good—its output plus or minus any imports or exports. In the example
above, the U.S. consumption of watches (cell C10) is its production
level (2 billion watches in cell C9) minusits trade in watches ( 1.5 in
cell C12) for a total consumption of 2 ( 1.5) 3.5 billion watches.
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