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Interdependence and the Gains from Trade 727
37.
Two countries can achieve gains from trade even if one country has an absolute advantage in the
production of both
goods.
a.
True
b.
False
38.
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.
a.
True
b.
False
39.
Fred trades 2 tomatoes to Barney in exchange for 1 pumpkin. Fred and Barney both gain from
the exchange. We
can conclude that, for Barney, the opportunity cost of producing 1 pumpkin is
greater than 2 tomatoes.
a.
True
b.
False
40.
Differences in opportunity cost allow for gains from trade.
a.
True
b.
False
41.
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.
a.
True
b.
False
42.
Trade allows a person to obtain goods at prices that are less than that person's opportunity cost
because each person
specializes in the activity for which he or she has the lower opportunity cost.
a.
True
b.
False
43.
Specialization and trade can make everyone better off if a person can obtain goods at prices that
are less than that
person's opportunity cost.
a.
True
b.
False
44.
When each person specializes in producing the good in which he or she has a comparative
advantage, each person
can gain from trade but total production in the economy is unchanged.
a.
True
b.
False
45.
For both parties to gain from trade, the price at which they trade must lie exactly in the middle of
the two opportunity
costs.
a.
True
b.
False
46.
For both parties to gain from trade, the price at which they trade must lie between the two
opportunity costs.
a.
True
b.
False
47.
Ellie and Brendan both produce apple pies and vanilla ice cream. If Ellie’s opportunity cost of one
apple pie is 1/2
gallon of ice cream and Brendan’s opportunity cost of one apple pie is 1/4 gallon
of ice cream, a mutually
advantageous trade can be struck at a price of one apple pie for 1/3
gallon of ice cream.
a.
True
b.
False
48.
Adam Smith was the author of the 1776 book An Inquiry into the Nature and Causes of the
Wealth of Nations.
a.
True
b.
False
49.
David Ricardo was the author of the 1817 book Principles of Political Economy and Taxation.
a.
True
b.
False
50.
Adam Smith wrote that a person should never attempt to make at home what it will cost him more
to make than to
buy.
a.
True
b.
False
51.
Adam Smith developed the theory of comparative advantage as we know it today.
a.
True
b.
False
52.
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.
a.
True
b.
False
53.
Goods produced abroad and sold domestically are called exports and goods produced domestically
and sold abroad
are called imports.
a.
True
b.
False
54.
International trade may make some individuals in a nation better off, while other individuals are
made worse off.
a.
True
b.
False
55.
For international trade to benefit a country, it must benefit all citizens of that country.
a.
True
b.
False
56.
Some countries win in international trade, while other countries lose.
a.
True
b.
False
57.
If a country has a lower opportunity cost than its potential trading partner, the country should
decide to be self-
sufficient.
a.
True
b.
False
58.
International trade can make some individuals within a country worse off, even as it makes the
country as a whole
better off.
a.
True
b.
False
59.
Trade allows all countries to achieve greater prosperity.
a.
True
b.
False
60.
Explain the difference between absolute advantage and comparative advantage. Which is more
important in
determining trade patterns, absolute advantage or comparative advantage? Why?
61.
The only two countries in the world, Alpha and Omega, face the following production possibilities
frontiers.
Alpha’s Production Possibilities Frontier Omega’s Production Possibilities Frontier
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.
Interdependence and the Gains from Trade 737
62.
Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Jacque can fix the same
kind of meal in 2
hours, and his opportunity cost of one hour is $20. Will both Julia and Jacque be
better off if she pays him $45 per
meal to fix her meals? Explain.
63.
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?
Interdependence and the Gains from Trade 739
Problems
1.
Suppose that Venezuela produces beef and oil and it can switch production between each at a
constant rate. If the
most beef it can produce is 300 million pounds and the most oil it can produce
is 50 million barrels, then what is the
opportunity cost of a pound of beef and what is the
opportunity cost of a barrel of oil?
2.
Charlotte can produce pork and beans and can switch between producing them at a constant rate.
If it takes her 10
hours to produce a pound of pork and 5 hours to produce a pound of beans, what
is her opportunity cost of pork and
what is her opportunity cost of beans?
740 Interdependence and the Gains from Trade
Scenario 3-1
The production possibilities frontiers below show how much Greg and Catherine can each produce
in 8 hours of
time.
Greg’s Production Possibilities Catherine’s Production Possibilities
3.
Refer to Scenario 3-1. What is Greg’s opportunity cost of producing ice cream? Explain how you
derived your
answer.
4.
Refer to Scenario 3-1. What is Greg’s opportunity cost of producing cake? Explain how you
derived your answer.
5.
Refer to Scenario 3-1. What is Catherine’s opportunity cost of producing ice cream? Explain
how you derived
your answer.
6.
Refer to Scenario 3-1. What is Catherine’s opportunity cost of producing cake? Explain how you
derived your
answer.
