Exam 3: Interdependence and the Gains From Trade

Figure 3-3 Ice cream and cones are measured in kilograms. -Refer to Figure 3-3. For Ben, what is the opportunity cost of 1 kg of cones?

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

-Refer to Table 3-6. How could Denmark and Italy benefit?

What are exports?

-Refer to Table 3-6. Which country has an absolute advantage in each product?

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

How does trade benefit the two parties involved?

Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 5 bushels of corn or 50 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. If the two countries do not trade, Cornland will produce and consume 400 bushels of corn and 100 bushels of oats, while Oatland will produce and consume 50 bushels of corn and 500 bushels of oats. Combined output for the two countries would therefore be 450 bushels of corn and 600 bushels of oats. If the two countries do trade, each will completely specialize in producing the crop for which it has a comparative advantage. If trade occurs, by what amount will the combined output for the two countries increase?

What is the term for a good that is produced abroad and sold domestically?

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

Figure 3-6 These figures illustrate the production possibilities available to Barney and Betty with eight hours of labour in their bakery. -Refer to Figure 3-6. What is the opportunity cost of one pie for Betty?

Figure 3-1 -Refer to Figure 3-1. If Paul divides his time equally between corn and wheat, what will he be able to produce?

When will a production possibilities frontier be linear and not bowed out?

Figure 3-2 -Refer to Figure 3-2. Assume that Cliff and Paul were both producing wheat and corn, and both were dividing their time equally between the two. Then they decide to specialize in the product for which they have a comparative advantage and trade 3 bushels of wheat for 3 bushels of corn. What would Cliff now be able to consume?

What did Adam Smith believe about trade?

-Refer to Table 3-2. What does each producer have an absolute or comparative advantage in?

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

-Refer to the table. What is the opportunity cost of one sled for Summer?

Trade is based on absolute advantage.

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?