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Exam 3: Interdependence and the Gains from Trade

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Question 1

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Unless two people who are producing two goods have exactly the same opportunity costs,each will have a comparative advantage in a different good.

A) True
B) False

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Question 2

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It takes Barbara 3 hours to make a pie and 4 hours to make a shirt.It takes Gary 2 hours to make a pie and 5 hours to make a shirt.Barbara should specialize in making shirts and Gary should specialize in making pies,then they should trade.

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B) False

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Question 3

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Explain the difference between absolute advantage and comparative advantage.Which is more important in determining trade patterns and why?

What should a country do if it has a comparative advantage in a product?

The "two-country?two-good" model (sometimes called the 2×2 model)of comparative advantage that we have studied so far is simple,insightful,and compelling.However,its very simplicity turns out to be its weakness.In the real world,when many countries produce many goods,the simple 2×2 model is of limited use in predicting patterns of trade.To see how complex such a model can become,let us consider a 2×3 model (two countries,1 and 2,and three goods,A,B,and C.)The following table gives the maximum amounts (units)of each good that each country can produce if all the country's resources were used in the production of the respective good.In other words,the table describes each country's production possibilities frontier. $\begin{array} { | l | l | l | l | } \hline & \begin{array} { l } \text { Good A } \\\text { (units) }\end{array} & \begin{array} { l } \text { Good B } \\\text { (units) }\end{array} & \begin{array} { l } \text { Gaod C } \\\text { (units) }\end{array} \\\hline \text { Caunty 1 } & 1 & 3 & 6 \\\hline \text { Canty 2 } & 2 & 4 & 4 \\\hline\end{array}$ a.How do the production possibilities frontiers for each of the two countries look in a three-dimensional coordinate system? (Draw three axes like a corner in your room, and label them after the three goods: A, B, and C. Then, place the number of units for each good for Country 1on its respective axis and connect the three intercepts by straight lines. Repeat for Country 2 on a separate graph.) b.Calculate the opportunity costs of good A in terms of B and C in each country and call these prices PA1 and PA2 respectively. c.Calculate the opportunity costs of good B in terms of A and C in each country and call these prices PB1 and PB2 respectively. d.Calculate the opportunity costs of good C in terms of A and B in each country and call these prices PC1 and PC2 respectively. e.Based on your calculations, can you tell which country should export or import each product based on comparative advantage?

Suppose a gardener produces both green beans and corn in her garden.If she must give up 13 bushels of corn to get 5 bushels of green beans,what is the opportunity cost of 1 bushel of green beans?

Figure 3-3 Ice cream and cones are measured in kilograms. -Refer to Figure 3-3.What does each of the two producers have a comparative or absolute advantage in?

Figure 3-1 -Refer to Figure 3-1.What do the two producers have a comparative advantage in?

Table 3-6 -Refer to Table 3-5.What is the opportunity cost of one unit of bread in England?

How does trade benefit the two parties involved?

Table 3-4 -Refer to the table.If Alberta and Manitoba trade based on the principle of comparative advantage,what will be exported?

Table 3-6 -Refer to Table 3-5.If England and Spain specialize and trade according to their respective comparative advantage,who gains in the short run in England?

Suppose labour in Mexico is less productive than labour in Canada.What can we conclude from this information?

When can a country's consumption possibilities frontier be outside its production possibilities frontier?

Figure 3-4 -Refer to Figure 3-4.What does each of the two producers have a comparative or absolute advantage in?

Table 3-2 -Refer to Table 3-2.What is the opportunity cost of 1 kilogram of potatoes for the rancher?

When each person specializes in producing the good for which he or she has a comparative advantage,each person can gain from trade but total production in the economy is unchanged.

Table 3-5 -Refer to Table 3-5.If Japan and Canada open up trade based on the principle of comparative advantage,who loses in the short term in Canada?

International trade may make some individuals in a nation better off,while other individuals are made worse off.

Figure 3-1 -Refer to Figure 3-1.Assume that Cliff and Paul were both producing wheat and corn,and each was dividing their time equally between the two.Then they decide to specialize in the product they have a comparative advantage in.What would happen to the total production of corn?