92 ❖ Chapter 3/Interdependence and the Gains from Trade
Figure 3-11
The graph below represents the various combinations of ham and cheese (in pounds) that the nation of
Bonovia could produce in a given month.
(in pounds)
(in pounds)
40 80 120 160 200 240 280 320 360 400 Ham
40
80
120
160
200
240
280
320
360
Cheese
28. Refer to Figure 3-11. In the nation of Cropitia, the opportunity cost of a pound of cheese is 1.5 pounds of
ham. Based on this information, if Bonovia and Cropitia want to trade, Bonovia should specialize in the pro-
duction of
a.
ham and import cheese.
b.
cheese and import ham.
c.
both goods and import neither good.
d.
neither good and import both goods..
29. Refer to Figure 3-11. In the nation of Cropitia, the opportunity cost of a pound of cheese is 1.5 pounds of
ham. Based on this information, if Bonovia and Cropitia want to trade, Cropitia should specialize,in the pro-
duction of
a.
ham and import cheese.
b.
cheese and import ham.
c.
both goods and import neither good.
d.
neither good and import both goods..
CONCLUSION
1. Which of the following is not an example of the principle that trade can make everyone better off?
a.
Americans buy tube socks from China.
b.
Residents of Maine drink orange juice from Florida.
c.
A homeowner hires the kid next door to mow the lawn.
d.
All of the above are examples of the principle that trade can make everyone better off.
Chapter 3/Interdependence and the Gains from Trade ❖ 93
TRUE/FALSE
1. In most countries today, many goods and services consumed are imported from abroad, and many goods and
services produced are exported to foreign customers.
2. Interdependence among individuals and interdependence among nations are both based on the gains from
trade.
3. If a person chooses self-sufficiency, then she can only consume what she produces.
4. 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.
5. Assume a farmer has the ability to produce corn and/or beans. Whenever the farmer spends 1 hour less pro-
ducing corn and 1 hour more producing beans, he reduces his output of corn by 2 bushels and raises his output
of beans by 3 bushels. In view of these assumptions, the farmer’s production possibilities frontier is bowed
out.
6. 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.
7. It is possible for the U.S. to gain from trade with Germany even if it takes U.S. workers fewer hours to pro-
duce every good than it takes German workers.
8. A production possibilities frontier is a graph that shows the combination of outputs that an economy should
produce.
9. Production possibilities frontiers cannot be used to illustrate tradeoffs.
94 ❖ Chapter 3/Interdependence and the Gains from Trade
10. The production possibilities frontier shows the trade-offs that the producer faces but does not identify the
choice the producer will make.
11. An economy can produce at any point on or inside its production possibilities frontier, but it cannot produce at
points outside its production possibilities frontier.
12. An assumption of the production possibilities frontier model is that technology is fixed.
13. Trade allows a country to consume outside its production possibilities frontier.
14. Opportunity cost refers to how many inputs a producer requires to produce a good.
15. Opportunity cost measures the trade-off between two goods that each producer faces.
16. For a country producing two goods, the opportunity cost of one good will be the inverse of the opportunity
cost of the other good.
17. Henry can make a bird house in 3 hours and he can make a bird feeder in 1 hour. The opportunity cost to Hen-
ry of making a bird house is 1/3 bird feeder.
18. In one month, Moira can knit 2 sweaters or 4 scarves. In one month, Tori can knit 1 sweater or 3 scarves.
Moira’s opportunity cost of knitting scarves is lower than Tori’s opportunity cost of knitting scarves.
19. Suppose that in one hour Dewey can produce either 10 bushels of corn or 20 yards of cloth. Dewey’s oppor-
tunity cost of producing one bushel of corn is 1/2 yard of cloth.
Chapter 3/Interdependence and the Gains from Trade ❖ 95
20. Jake can complete an oil change in 45 minutes and he can write a poem in 90 minutes. Ming-la can complete
an oil change in 30 minutes and she can write a poem in 90 minutes. Jake’s opportunity cost of writing a poem
is lower than Ming-la’s opportunity cost of writing a poem.
21. 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. Har-
ry’s opportunity cost of repairing the computer is lower than Quinn’s.
22. 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.
23. If a country has the comparative advantage in producing a product, then that country must also have the abso-
lute advantage in producing that product.
24. In an economy consisting of two people producing two goods, it is possible for one person to have the abso-
lute advantage and the comparative advantage in both goods.
25. If one producer is able to produce a good at a lower opportunity cost than some other producer, then the pro-
ducer with the lower opportunity cost is said to have an absolute advantage in the production of that good.
26. 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 oth-
er good.
27. When there are two people and each is capable of producing two goods, it is possible for one person to have a
comparative advantage over the other in both goods.
96 ❖ Chapter 3/Interdependence and the Gains from Trade
28. 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 web-
sites and the absolute advantage in both goods.
29. Timmy can edit 2 pages in one minute and he can type 80 words in one minute. Olivia can edit 1 page in one
minute and she can type 100 words in one minute. Timmy has an absolute advantage and a comparative ad-
vantage in editing, while Olivia has an absolute advantage and a comparative advantage in typing.
30. 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.
31. 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.
32. 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.
33. 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, Ellie has a
comparative advantage in the production of ice cream.
34. 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 ad-
vantage.
35. The gains from specialization and trade are based on absolute advantage.
Chapter 3/Interdependence and the Gains from Trade ❖ 97
36. Trade can benefit everyone in society because it allows people to specialize in activities in which they have a
comparative advantage.
37. Two countries can achieve gains from trade even if one country has an absolute advantage in the production of
both goods.
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.
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.
40. Differences in opportunity cost allow for gains from trade.
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.
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.
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.
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.
98 ❖ Chapter 3/Interdependence and the Gains from Trade
45. For both parties to gain from trade, the price at which they trade must lie exactly in the middle of the two op-
portunity costs.
46. For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs.
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.
48. Adam Smith was the author of the 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.
49. David Ricardo was the author of the 1817 book Principles of Political Economy and Taxation.
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.
51. Adam Smith developed the theory of comparative advantage as we know it today.
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.
53. Goods produced abroad and sold domestically are called exports and goods produced domestically and sold
abroad are called imports.
54. International trade may make some individuals in a nation better off, while other individuals are made worse
off.
Chapter 3/Interdependence and the Gains from Trade ❖ 99
55. For international trade to benefit a country, it must benefit all citizens of that country.
56. Some countries win in international trade, while other countries lose.
57. If a country has a lower opportunity cost than its potential trading partner, the country should decide to be self–
sufficient.
58. International trade can make some individuals within a country worse off, even as it makes the country as a
whole better off.
59. Trade allows all countries to achieve greater prosperity.
SHORT ANSWER
1. Explain the difference between absolute advantage and comparative advantage. Which is more important in
determining trade patterns, absolute advantage or comparative advantage? Why?
100 ❖ Chapter 3/Interdependence and the Gains from Trade
2. 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
25 50 75 100 125 150 175 200 225 250 peanuts
25
50
75
100
125
150
175
200
225
250
275
300
popcorn
25 50 75 100 125 150 175 200 225 peanuts
25
50
75
100
125
150
175
200
225
250
275
300
popcorn
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.
Alpha’s Production Possibilities Frontier
Omega’s Production Possibilities Frontier
25 50 75 100 125 150 175 200 225 250 peanuts
25
50
75
100
125
150
175
200
225
250
275
300
popcorn
Chapter 3/Interdependence and the Gains from Trade ❖ 101
3. 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.
4. 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?
a.
If both tasks are divided equally, it will take 11 hours for the calculations and 15 hours for the writing,
for a total of 26 hours.
If Diane specializes in calculating and Gary specializes in preparing slides, it will take 22 hours to