1

Example Questions for Global Strategy Midterm (April 12, 2014 version)
Comparative Advantage Question
1. The production of soccer balls can be reduced to two basic steps. First, you need to make an inner
bladder by blowing air into a mold containing latex. Second, synthetic leather panels (20 hexagons
and 12 pentagons) are cut and stitched together (so the patches that give a soccer ball its
distinguished shape) into a ball-cover which the bladder is then inserted into. Thus, each soccer ball
consists of one bladder (B) and one cover (C). Consider a Ball manufacturing firm that has 300
workers in its Thai factory, and 200 workers in its Malaysian factory. And in the short run, as before,
the firm cannot add or subtract workers, or move workers between factories. For the moment, let
us also assume that transport costs are negligible. Consider then the following weekly productivity
matrix for the output of a worker:
Activity:
Covers Bladders
Malaysian-Factory 30 90
Thai-Factory 20 40

a. Which Factory has an absolute advantage in Covers and which factory has an absolute advantage in
Bladders? Explain. (2 pts.)
Malaysia has an absolute advantage in both Covers and Bladders, as a worker can produce 30 covers a
week and 90 Bladders a week in Malaysia, as opposed to 20 Covers and 40 Bladders a week in Thailand.

b. If each Factory needed to autonomously (so self-sufficiency with no trade between factories)
produce soccer balls, what would the weekly production be in the Malaysian factory, the Thai-
factory, and for the whole firm? (4 pts.)
Malaysia:
o 30 L
C
= 90 (200-L
C
), thus L
C
= 150, and L
B
= 50
o Thus q=4500 balls per week
Thailand:
o 20 L
C
= 40 (300-L
C
), thus L
C
= 200, and L
B
= 100
o Thus q=4000 balls per week
Total Q = 4500 + 4000 = 8500

c. What is the opportunity cost for Covers and for Bladders for both the Malaysian and Thai factories?
(4 pts.)
The opportunity cost for Covers in Malaysia is 3 Bladders (90 Bladders /30 Covers)
The opportunity cost for Bladders in Malaysia is 1/3 Covers (30 Covers /90 Bladders)
The opportunity cost for Covers in Thailand is 2 Bladders (40 Bladders /20 Covers)
2

The opportunity cost for Bladders in Thailand is 1/2 Covers (20 Covers /40 Bladders)

d. What allocation of labor tasks in both the Malaysian and Thai factory will still in the short run (i.e.,
we cant add or subtract workers or move workers from one factory to another) maximize output
for this firm given the number of employees (i.e., how many employees should be allocated to
Bladders and Covers in both factories)? What is the Total Output for the firm now? (4 pts.)
Thailand specializes in its comparative advantage of Covers.
o So 300 workers * 20 covers a week = 6000 Covers
Malaysian allocation of labor can be solved by:
o 6000 + 30 L
C
= 90 (200-L
C
), thus L
C
= 100, and L
B
= 100
o Thus the Malaysian factory produces 3000 additional Covers to add to the 6000 Covers being
imported from Thailand. And the Malaysian factory makes 9000 Bladders. Thus there is total of
9000 soccer balls being produced per week.

e. Now lets open things up to the long-run and allow employment levels to be a decision variable and
not a sunk cost. Thus, the Ball manufacturing company can take wages and exchange rates into
account by opening and closing factories. Starting at wage parity between the Malaysian and Thai
factories, draw the Malaysian Relative Wage line for both Covers and Bladders. In particular, identify
the points where the cost of production advantage (i.e., competitive advantage) switches from one
factory to another. (2 pts.)
--- Malaysia prod. Bladderrs ------------------------- (2.25) ----Thailand produces Bladders --
---- Malaysia prod. Covers ---- (1.5) -------Thailand produces Covers --------------------------
-------------------------------------------------------------------------------------------------------------------
- Thus Malaysia will have the competitive advantage in covers so long as its wage rate
stays below 150% of that of Thailand, due to a Malaysian worker being 150% as
productive as a Thai worker (30/20 = 1.5)
- Further, Malaysia will have the competitive advantage in Bladders so long as its wage
rate stays below 225% of Thailand, due to a Malaysian worker being 225% as productive
as a Thai worker (90/40 = 2.25).

f. Given a Thai weekly wage equivalent to $150, at what weekly Malaysian wage (in dollars) would
Thailand begin to produce Covers, and at what weekly Malaysian wage (in dollars) would Thailand
began to produce Bladders? (2 pts.)
Thailand will begin to produce covers once wages in Malaysia are $225 and above.
o 150% of 150 = $225
Thailand will begin to produce bladders once wages in Malaysia are $337.50 and above.
o 225% of 150 = $337.50

3

Border Effects Question/Alternative Calculations
One could use the same data that I presented in class to calculate the impact of the Canadian/US border with
different pairings. So, for example, doing so from Ontario (not Ohio) as the origin region. See the following
calculations for that comparison (as an aside, you could use different pairings as well to measure border
effectsplay around with the data within your group to get comfortable with this):

Border effect: compare trade within borders (2 regions in same country) to trade across borders (2
regions in different countries)
Compare actual trade to trade predicted by the gravity equation
For example: compare region 2s exports to region 1 (same country)with region2s exports to region 3
(different country, so cross-border trade)
Actual Trade Ratio (ATR): F
21
/ F
23

Gravity-Predicted Trade Ratio (GPTR): [GM
2
M
1
/D
21
]/[GM
2
M
3
/D
23
]=[M
1
/D
21
]/[M
3
/D
23
] = [M
1
/M
3
]/[D
21
/D
23
]
So how wide is the US/Canada border with Ontario used as the benchmark (i.e., origin region)?
You need to make the following calculation:
ATR over GPTR
B
2:
= (F
21
/ F
23
)/ [(M
1
/ D
21
)/(M
3
/ D
23
)]
B
2:
= [(F
21
/F
23
)/(M
1
/M
3
)] / (D
21
/ D
23
)

This time we will really use the distance variables, so the relevant distances are:
BC Ontario is 3366 km
BC Wash is 189 km
BC Ohio is 3311 km
Ontario Wash is 3336 km
Ontario Ohio is 308 km
WA Ohio is 3264 km

The actual calculations would then be as follows:
Relative-Distance (D
21
/ D
23
) = 1.01
Relative GDP (M
1
/M
3
) = 0.48
Relative Trade (F
21
/ F
23
) = 6.68

GPTR: Rel GDP / Rel Dist = .48/1.01= 0.475
ATR: Rel Trade = 6.68
Border Effect: ATR / GPTR = 6.68/0.48 = 14
Accordingly, Ontario exports 14 times more to BC than it would in a borderless world.