Exam 3: Interdependence and the Gains From Trade

Antonio and Elyse are two woodworkers who both make kitchen cabinets and bathroom vanities. In one month, Antonio can make 12 kitchen cabinets or 36 bathroom vanities, where Elyse can make 10 kitchen cabinets or 50 bathroom vanities. Who has an absolute advantage in which product?

How is absolute advantage found?

-Refer to Table 3-3. What does each of the two producers have an absolute advantage in?

Figure 3-5 These graphs illustrate the production possibilities available for dancing shoes to Fred and Ginger with 40 hours of labour. -Refer to Figure 3-5. What is the opportunity cost of one pair of tap shoes for Fred?

-Refer to Table 3-6. If Denmark and Italy trade based on the principle of comparative advantage, which country will export or import each product?

What happens when countries specialize according to their comparative advantage?

-Refer to Table 3-1. What is the opportunity cost of 1 kg of meat for the rancher?

What is the term that means whatever must be given up to obtain an item?

Suppose that a worker in Boatland can produce either 5 units of wheat or 25 units of fish per year, and a worker in Farmland can produce either 25 units of wheat or 5 units of fish per year. There are 10 workers in each country. No trade occurs between the two countries. Boatland produces and consumes 25 units of wheat and 125 units of fish per year, while Farmland produces and consumes 125 units of wheat and 25 units of fish per year. If trade were to occur, Boatland would trade 100 units of fish to Farmland in exchange for 100 units of wheat. If Boatland no longer grew any of its own wheat, how many units of fish could it now consume along with the 100 units of imported wheat?

-Refer to Table 3-6. If Denmark and Italy trade based on the principle of comparative advantage, which country will export or import each product?

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

According to Adam Smith, what should a person never attempt to make at home?

Suppose that a worker in Freedonia can produce either 12 units of corn or 4 units of wheat per year, and a worker in Sylvania can produce either 4 units of corn or 12 units of wheat per year. Each nation has 10 workers. Without trade, Freedonia produces and consumes 60 units of corn and 20 units of wheat per year. Sylvania produces and consumes 20 units of corn and 60 units of wheat. Then suppose that trade is initiated between the two countries, and Freedonia sends 60 units of corn to Sylvania in exchange for 60 units of wheat. What maximum amounts will Freedonia now be able to consume?

-Refer to Table 3-1. What does each producer have an absolute or comparative advantage in?

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 and trade 3 bushels of wheat for 3 bushels of corn. What would Cliff now be able to consume?

This exercise introduces the concept of "consumption possibilities frontier." Suppose Argentina (A) and Bolivia (B) only trade with each other and they both produce the same two goods: grocery (G) and fish (F). Given its resources, Argentina can produce either 2 units of grocery per day or 1 unit of fish; Bolivia can produce either 5 units of grocery or 4 units of fish. The international price of fish is equal to the average of the opportunity costs of production in the two countries. a. Draw the production possibilities frontiers for each country on separate graphs. b. If Argentina specializes in the production of groceries and sells them all to Bolivia, how much fish could it buy from Bolivia? c. If Bolivia specializes in the production of fish and sells it all to Argentina, how much groceries could it buy? d. Based on the results of parts b and c, using the production possibilities frontier you drew in part a, draw the consumption possibilities frontier for each country. (A consumption possibilities frontier is a straight line that connects the maximum amount of fish and groceries that a country can afford to consume from its own production or from importing.) d. Is there anything that might not be correct? (Hint: Is Argentina capable of buying all of Bolivia's fish production? Is Argentina capable of exporting as much groceries as Bolivia could import?)

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

Figure 3-4 -Refer to Figure 3-4. Suppose Ben and Jerry both spend half their time producing beer and half their time producing wine. How much wine and beer does each produce?

-Refer to Table 3-5. Which country has an absolute or comparative advantage in each product?

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. Who has a comparative advantage in each product?