Exam 3: Interdependence and the Gains From Trade

Suppose that a worker in Taiwan can make 2 TVs or 10 pairs of shoes per week, and a worker in Korea can make 3 TVs or 20 pairs of shoes per week. a. In what sense do TVs and shoes cost less in Korea than in Taiwan? b. In what sense do TVs cost less in Taiwan than in Korea? c. If Taiwan and Korea were to engage in trade, which country would export which good? d. How would the answer to the question in part c change if a worker in Korea could make 4 TVs per week?

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 a comparative advantage in which product?

Suppose Alberta and British Columbia (BC) have the production possibilities frontiers shown in the following graph. Suppose you wanted to determine which of the two provinces was economically better off. Is the given information sufficient? If yes, which province is better off? If not, make assumptions about the additional information that you need and determine which province is better off. How sensitive is your answer to variations in your assumptions? Figure 3-13

-Refer to Table 3-5. What is the opportunity cost of one airplane for Japan?

It takes Fred 6 hours to produce a bushel of corn and 2 hours to wash and polish a car. It takes Wilma 6 hours to produce a bushel of corn and 1 hour to wash and polish a car. Wilma and Fred cannot gain from specialization and trade, since it takes each of them 6 hours to produce 1 bushel of corn.

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. Who has a comparative or absolute advantage in what product?

As long as two people have different opportunity costs, each can gain from trade by being able to obtain a good at a price lower than his or her opportunity cost.

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

Trade allows a person to obtain goods at prices that are less than that person's opportunity cost because each person concentrates on the activity for which he or she has the lower opportunity cost.

Suppose that the country of Atlantis chose to isolate itself from the rest of the world. Its ruler proclaimed that Atlantis should become self-sufficient and so would not engage in foreign trade. From an economic perspective, when would this idea make sense?

A baker can produce only bread, while a butcher can produce only sliced deli meats. If the baker and the butcher like both foods, which of the following is most likely?

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

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

Using all available resources, if a farmer can produce either 65 cantaloupes or 70 watermelons, what is the opportunity cost of 1 cantaloupe to the farmer?

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.

Some countries win in international trade, while other countries lose.

Which of the following do economists generally support?

Deb grows flowers and makes vases. D'Arcy also grows flowers and makes vases, but Deb is better at producing both. Who has an absolute or comparative advantage in what activity?

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. Good A (units) Good B (units) Good C (units) Country 1 1 3 6 Country 2 2 4 4 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?

-Refer to Table 3-6. Denmark and Italy trade according to the principle of comparative advantage. If the international price of bread is 2.5 units of cheese for 1 unit of bread, what is the gain from trade to Denmark per unit of bread traded?