Exam 3: Interdependence and the Gains From Trade: Part B

When it is said that trade between nations can make both sides of the trade better off,this means that all citizens in each nation will benefit.

Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods.

A country can have a comparative advantage in the production of a good,even if it does not have an absolute advantage in the production of that good.

International trade may make some individuals in a nation better off,while other individuals are made worse off.

Adam Smith developed the theory of comparative advantage as we know it today.

As long as two people have different opportunity costs,each can gain from trade with the other,since trade allows each person to obtain a good at a price lower than his or her opportunity cost.

Suppose Hank and Tony can both produce corn.If Hank's opportunity cost of producing a bushel of corn is 2 bushels of soybeans and Tony's opportunity cost of producing a bushel of corn is 3 bushels of soybeans,then Hank has the comparative advantage in the production of corn.

To produce 100 bushels of wheat,Farmer A requires fewer inputs than does Farmer B.We can conclude that Farmer A has an absolute advantage over Farmer B in producing wheat.

International trade can make some individuals within a country worse off,even as it makes the country as a whole better off.

A production possibilities frontier is a graph that shows the combination of outputs that an economy should produce.

Interdependence among individuals and interdependence among nations are both based on the gains from trade.

In one month,Moira can knit 2 sweaters or 4 scarves.In one month,Tori can knit 1 sweater or 3 scarves.Together,they could produce more output in total if Moira knits only sweaters and Tori knits only scarves.

Production possibilities frontiers cannot be used to illustrate tradeoffs.

Henry can make a bird house in 3 hours and he can make a bird feeder in 1 hour.The opportunity cost to Henry of making a bird house is 1/3 bird feeder.

The principle of comparative advantage states that,regardless of the price at which trade takes place,everyone will benefit from trade if they specialize in the production of the good for which they have a comparative advantage.

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

If a country has a lower opportunity cost than its potential trading partner,the country should decide to be self-sufficient.

Differences in opportunity cost allow for gains from trade.

If Wrex can produce more math problems per hour and more book reports per hour than Maxine can,then Wrex cannot gain from trading math problems and book reports with Maxine.

It takes Anne 3 hours to make a pie and 4 hours to make a shirt.It takes Mary 2 hours to make a pie and 5 hours to make a shirt.Anne should specialize in making shirts and Mary should specialize in making pies,and they should trade.