Exam 3: Interdependence and the Gains From Trade

Table 3-3 -According to Table 3-3:

Use the accompanying table to answer the following questions. Table 3-4 -Refer to Table 3-4. The opportunity cost of one unit of cheese in Spain is:

Use the accompanying table to answer the following questions. Table 3-4 -According to Table 3-4:

The only two countries in the world, Alpha and Omega, face the production possibilities frontiers shown. 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 will be the total world production of popcorn and peanuts? c. Now suppose that each country decides to specialise in the good in which each has a comparative advantage. 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 will receive from trade. Label these points B. A. b. If these countries choose not to trade, what will be the total world production of popcorn and peanuts? c. Now suppose that each country decides to specialise in the good in which each has a comparative advantage. 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 will receive from trade. Label these points B.

Table 3-1 -According to Table 3-1:

A Korean worker can produce 10 cars per month or grow 1500 kg of wheat per month and an American worker can produce four cars or 1700 kg of rice per month. Korea and the US can both gain if Korea makes more cars and exports them to the US in exchange for imports of increased output of Australian rice.

Differences in opportunity cost and comparative advantage allow for gains from trade.

George and Martha face the production possibilities frontiers shown for brownies and cupcakes. a. If George and Martha choose not to trade and divide their time equally between the production of brownies and cupcakes, how many of each would they be able to consume? (Show this point on your graphs.) b. Now assume that George and Martha each decide to specialise in the good in which they have a comparative advantage and then trade. Who would trade brownies and who would trade cupcakes? c. If George and Martha decided to trade 60 brownies for 60 cupcakes, how many cupcakes and brownies would each have to consume? d. How do we know each is better off with trade than acting alone?

Adam Smith's book An Inquiry into the Nature and Causes of the Wealth of Nations inspired David Ricardo, a millionaire stockbroker, to become an economist.

Table 3-2 -According to Table 3-2:

Graph 3-2 These figures illustrate the production possibilities available to Amy and Jim with 8 hours of labour. -Refer to Graph 3-2. The opportunity cost of one coffee for Amy is:

One reason trade benefits both parties is that it allows each to specialise in what they do better.

John can milk 20 cows or feed 40 calves in one hour. Jared can milk 10 cows or feed 50 calves in one hour. a. Who has the absolute advantage in milking cows? Who has the absolute advantage in feeding calves? b. Who has the comparative advantage in milking cows? Who has the comparative advantage in feeding calves? c. If John and Jared, who have been dividing their time equally between milking and feeding, each specialise in the activity in which they have a comparative advantage, how many additional cows can be milked and calves fed per hour?