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Nontraded Services Comparative Advantage

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In the manufacturing sector, Japanese labor productivity is roughly the same as that of the United States (higher in some industries, lower in others). However, the United States is still considerably more productive in the service sector, with most services being nontraded. Some analysts have argued that this poses a problem for the United States because its comparative advantage lies in things that cannot be sold on world markets. Explain what might be wrong with this argument. How do nontraded goods affect the possible gains from trade?

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Solution Preview

From the Balassa-Samuelson effect, an increase in wages in the tradable goods sectors will lead to higher wages in the non-tradable or service sector of USA. Since, USA is not a fast growing economy, the inflation rates do not increase too much. The effect of possible gains from trade translates into higher wages for ...

Solution Summary

The answer to this problem explains how nontraded services in US affect its trade. The references related to the answer are also included.

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