Exam 3: Interdependence and the Gains from Trade

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.) e. Think about your answer in part 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?)

What are imports?

Figure 3-3 Ice cream and cones are measured in kilograms. -Refer to Figure 3-3.Suppose Ben and Jerry were both producing at point A on their production possibilities frontier and then Ben decided he would be willing to trade 4 kg of cones to get 2 kg of ice cream from Jerry.If both decided to specialize in what they had a comparative advantage in and trade,what would be the gains from trade?

Figure 3-2 -Refer to Figure 3-2.Assume that both Paul and Cliff divide their time equally between the production of corn and wheat,and they do not trade.If they were the only producers of corn and wheat,what would the total production of wheat and corn be?

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

Greece and Germany can both produce fish and cars.Greece has a comparative advantage in cars,but Germany has an absolute advantage in cars.What would Germany import from Greece?

Table 3-3 -Refer to Table 3-3.What is the opportunity cost of one dress for Helen?

What is David Ricardo known for?

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.Assume that both Paul and Cliff divide their time equally between the production of corn and wheat,and they do not trade.If they were the only producers of corn and wheat,what would the total production of wheat and corn be?

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 advantage in?

The only two countries in the world,Alpha and Omega,face the following production possibilities frontiers. a.Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A. b.If these countries choose not to trade, what would be the total world production of popcorn and peanuts? c.Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now? d.If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.

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

Suppose it takes a Chinese worker 2 hours to produce a ceramic pot,and 20 hours to produce a tablecloth.Suppose that it takes a Canadian worker 2 hours to produce a ceramic pot and 10 hours to produce a tablecloth.It will benefit China to produce extra pots and export them to Canada in return for imported Canadian tablecloths.

Differences in opportunity cost allow for gains from trade.

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?

For two people who are planning to trade two different goods,when will there NOT be a comparative advantage for either?

Belarus has a comparative advantage in the production of linen and an absolute advantage in the production of beer,compared to Russia.If these two countries decide to trade,what would the pattern of trade be?

Table 3-2 -Refer to Table 3-2.What does each producer have an absolute or comparative 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 should Fred and Ginger produce?