Exam 3: Interdependence and the Gains From Trade

The principle of comparative advantage does not provide answers to certain questions. One of those questions is

Adam Smith was the author of the 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.

Sally can make 8 cups of soup per hour or 20 crackers per hour. Harry can make 10 cups of soup per hour or 30 crackers per hour. Can Sally and Harry gain from trade? If so, what is the range of prices of crackers for soup at which they would both find trade advantageous?

For international trade to benefit a country, it must benefit all citizens of that country.

Gary and Diane must prepare a presentation for their marketing class. As part of their presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides. a. How much time would it take the two to complete the project if they divide the calculations equally and the slides equally? b. How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or preparing slides? c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or preparing slides?

Figure 3-7 Bintu's Production Possibilities Frontier Juba's Production Possibilities Frontier -Refer to Figure 3-7. If Bintu and Juba both spend all of their time making bowls, then total production is

Table 3-26 Assume that Japan and Korea can switch between producing cars and producing airplanes at a constant rate. -Refer to Table 3-26. Japan has an absolute advantage in the production of

Table 3-18 The following table contains some production possibilities for an economy for a given month. -Refer to Table 3-18. If the production possibilities frontier is bowed outward, then "?" could be

A farmer has the ability to grow either corn or cotton or some combination of the two. Given no other information, it follows that the farmer's opportunity cost of a bushel of corn multiplied by his opportunity cost of a bushel of cotton

Figure 3-10 Alice and Betty's Production Possibilities in one 8­hour day. Alice's Production Possibilities Frontier Betty's Production Possibilities Frontier -Refer to Figure 3-10. If point A represents Alice's current production and point B represents Betty's current production, under what circumstances can both Alice and Betty benefit from specialization and trade?

Figure 3-3 Arturo's Production Possibilities Frontier Dina's Production Possibilities Frontier -Refer to Figure 3-3. If Dina must work 0.25 hour to produce each taco, then her production possibilities frontier is based on how many hours of work?

Trade between countries

Differences in opportunity cost allow for gains from trade.

Table 3-31 -Refer to Table 3-31. For the farmer, the opportunity cost of 1 pound of meat is

Table 3-12 Barb and Jim run a business that sets up and tests computers. Assume that Barb and Jim can switch between setting up and testing computers at a constant rate. The following table applies. -Refer to Table 3-12. The number of minutes needed by Barb to test a computer is

Figure 3-10 Alice and Betty's Production Possibilities in one 8­hour day. Alice's Production Possibilities Frontier Betty's Production Possibilities Frontier -Refer to Figure 3-10. Both Alice and Betty

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

Define absolute advantage.

Suppose the United States has a comparative advantage over Mexico in producing pork. The principle of comparative advantage asserts that

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.