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

Whenever a nation is producing on its PPF,that nation will be using all of its available resources.

Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

An assumption of the production possibilities frontier model is that technology is fixed.

Opportunity cost measures the trade-off between two goods that each producer faces.

Whenever a country has an absolute advantage in the production of a good,that implies that the country should specialize in the production of that good.

Trade does not benefit a nation if that nation has a comparative advantage in the production of that good.

The gains from specialization and trade are based on absolute advantage.

Suppose that in one hour Dewey can produce either 10 bushels of corn or 20 yards of cloth.Dewey's opportunity cost of producing one bushel of corn is 1/2 yard of cloth.

For both parties to gain from trade,the price at which they trade must lie between the two opportunity costs.

Harry is a computer company executive,earning $200 per hour managing the company and promoting its products.His daughter Quinn is a high school student,earning $6 per hour helping her grandmother on the farm.Harry's computer is broken.He can repair it himself in one hour.Quinn can repair it in 10 hours.Harry's opportunity cost of repairing the computer is lower than Quinn's.

For both parties to gain from trade,the price at which they trade must lie exactly in the middle of the two opportunity costs.

If one producer is able to produce a good at a lower opportunity cost than some other producer,then the producer with the lower opportunity cost is said to have an absolute advantage in the production of that good.

If US workers can produce everything in less time than Mexican workers,it is not possible for the US to gain from trade with Mexico.

If a country has the comparative advantage in producing a product,then that country must also have the absolute advantage in producing that product.

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

Unless two people who are producing two goods have exactly the same opportunity costs,then one person will have a comparative advantage in one good,and the other person will have a comparative advantage in the other good.

Trade allows a country to consume outside its production possibilities frontier.

If one producer has the absolute advantage in the production of all goods,then that same producer will have the comparative advantage in the production of all goods as well.

Adam Smith wrote that a person should never attempt to make at home what it will cost him more to make than to buy.

Zora can produce 4 quilts in a week and she can produce 1 corporate website in a week.Lou can produce 9 quilts in a week and he can produce 2 corporate websites in a week.Zora has the comparative advantage in quilts and the absolute advantage in neither good,while Lou has the comparative advantage in corporate websites and the absolute advantage in both goods.