Exam 2: The Power of Trade and Comparative Advantage

Figure: Countries A & B Reference: Ref 2-9 (Figure: Countries A & B) Refer to the figure regarding countries A &

The benefits of trade include: I. higher output due to specialization. II. higher output due to comparative advantage. III. increased welfare when preferences differ.

Which of the following statements shows how absolute advantage can be distinguished from comparative advantage? I. Absolute advantage refers to the ability to produce a good using fewer inputs, while comparative advantage is based on the monthly amount. II. Absolute advantage is based on the yearly production amount that a country can produce, while comparative advantage is based on the monthly production amount. III. Absolute advantage refers to the ability to produce a larger amount of goods with the same number of inputs, whereas comparative advantage refers to the ability to have the lowest opportunity cost of production.

The production possibility frontier shows:

Without trade, specialization is impossible.

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Which of the following is NOT a reason trade increases wealth?

Specializing in one's comparative advantage and trading with others will make individuals better off, but may not make countries better off.

In a world with trade, no one can afford to specialize.

Although trade increases productivity, it decreases society's collective knowledge because each person specializes in a very limited number of things.

Which statement best describes why people choose to specialize?

Reference: Ref 2-7 (Table: Production Possibilities for Italy and Belgium) According to the table on Production Possibilities for Italy and Belgium, the opportunity cost of 1 pound of linen for Italy is:

Trades are considered zero-sum transactions because if one person gains, the other must lose an equal amount.

The production possibilities frontier shows all the combinations of goods that a country can produce given its productivity and supply of inputs.

The opportunity cost of producing a particular good refers to:

In Narnia, one binky can be produced with two workers and one sippy cup can be produced with 0.25 workers. In Bedrock, one binky can be produced with one worker and one sippy cup can be produced with 0.50 workers. a. What is the opportunity cost of producing one sippy cup in Narnia and in Bedrock? b. Which country has the comparative advantage in sippy cups? c. Suppose that each country has 100 workers and completely specializes in its comparative advantage. How many units of output of sippy cups and binkys will each country produce? d. Before trade, Narnia produces 25 binkys and 200 sippy cups, and Bedrock produces 50 binkys and 100 sippy cups. Show how specialization and free trade can make each country better off than it was before the trade situation.

Suppose France can produce four phones or three computers with one unit of labor, and Sweden can produce one phone or two computers with one unit of labor. If France can trade only with Sweden, then the theory of comparative advantage suggests that:

Reference: Ref 2-9 (Figure: Countries A & B) Refer to the figure regarding countries A &B. The opportunity cost of producing Good X in Country A is _____ and in Country B it is _____ meaning that Country _____ should specialize in producing Good X and Country _____ in Good Y.

Reference: Ref 2-5 (Table: Production Possibilities for the United States and Mexico) According to the table on Production Possibilities for the United States and Mexico, Mexico's opportunity cost of producing each ton of potatoes is ______, while the United States' opportunity cost of producing each ton of potatoes is ______.

Owen Wilson is an actor who has acted in many action comedy films. In contrast, Tom Cruise has acted in many serious action films. How might the theory of specialization be applied to them?