CHAPTER 9: COMPARATIVE ADVANTAGE, EXCHANGE
RATES AND GLOBALIZATION
Questions and Exercises
1. A country does better exporting a good for which it has a comparative advantage
2. There is a basis for trade because Wadgetland can produce wadgets at a lower
opportunity cost than Widgetland. Wadgetland gives up 1/4 of a widget for every
wadget it makes, while Widgetland gives up 1 widget for every wadget it makes.
3. a. Iowa has a comparative advantage in bushels of corn (gives up 1/3 bushels of
wheat for every bushel of corn). Nebraska has a comparative advantage in wheat
(gives up 1/3 bushels of corn for every bushel of wheat). It would be
b. The states together produce 180 million bushels of both corn and wheat, but
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4. a. The countries must realize that the only way to get to the new consumption
combinations, they must specialize and then trade. Machineland has the
b. At points A and C the total production of machines is 110 and the total production
c. There is no set amount that a trader should receive, but the trader’s share should
d. If costs fell as production rose, the argument for specialization is even stronger.
5. a. The production possibility curves are shown in the
b. Busytown has a comparative advantage in producing
c. Busytown should produce 60,000 cars and
Lazyasiwannabe should produce 50,000 meals.
6. Traders get bigger gains from trade in newly opened markets where strong
competition among traders has yet to develop. The more competition that exists in
7. Smaller countries tend to get more of the gains from trade because more
8. International traders in small countries often have little competition and so keep
9. a. No. Both countries’ opportunity cost of producing pickles is 2 (they must give up
b. If per-unit cost of producing pickles and olives falls as more of each is produced,
10. Four reasons are: (1) Economists can identify both the costs and benefits of trade.
Laypeople often do not recognize that the decline in product prices is the result of
trade, while they can readily identify that lost jobs are the costs. (2) Economists
know that comparative advantage implies that each country is better at producing
at least one good. Laypeople worry that since wages are lower in China, it has a
11. False. According to the theory of comparative advantage, if one country has a
comparative advantage in one good, the other country must have a comparative
advantage in another good.
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12. While the loss of a comparative advantage in the manufacturing sector might have
hurt the United States’ economy in some ways, it has freed resources for the
13. Outsourcing has reduced the demand for manufactured jobs, reducing
employment and income in that industry. Manufacturing supported the middle
14. Any three of the following ten would be correct: (1) Skills of the U.S. labor force,
(2) U.S. governmental institutions, (3) U.S. physical and technological
15. Inherent comparative advantages are those that are based on factors that are
16. A country would prefer to have an inherent comparative advantage because it
17. The depreciation of a currency means that it takes fewer foreign currency units to
buy one domestic currency unit. In the case of the United States and China where
18. Domestic production is shown by Q0. Domestic consumption is Q1. The
a. The United States would like to raise world supply since it would increase
domestic production and reduce imports.
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b. This might happen in a variety of ways. The United States could gain a
Price
Quantity
S
D
S
W
Q
1
Q
0
P
W
19. The resource curse would worsen the distribution because it would cause an
appreciation in the value of the currency, lowering the world price level, making
the trade position for tradable goods worse. That is, a country’s exports would
Questions from Alternative Perspectives
1. Austrian
An Austrian would tend to agree with this statement because they believe that people
2. Religious
This is a judgment question in which answers will differ. A religiously oriented
3. Post-Keynesian
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a. Outsourcing tends to undermine the bargaining power of U.S. workers and
b. It will likely lead to lower U.S. wages than otherwise would have been the case.
c. Since lawyers need to be certified by state boards, they do not face as much
d. Yes, given that lawyers tend to have more influence in government, they would
4. Radical
a. This is a judgment call but an argument could be made that since there are
b. No, I probably would have advised them not to specialize in wine making.
5. Austrian and Post-Keynesian
Smith’s is a moral claim that is difficult to support or dispute. It depends on
sensibilities of people. Most people’s sensibilities would be similar to Smith’s.
Individuals care about others, especially the poor. Not only do they say this, but
they also demonstrate it by politically supporting programs that assist the poor
Whether this increase in inequality undermines Smith’s claim that all
people care about the poor is unclear. Society today is much richer than it was in
Smith’s time, and there are many different judgments about whether low-income
individuals in U.S. society should be classified as poor and miserable. Some
would argue yes, they should be so classified and the fact that we haven’t done
anything to stop the increase in inequality shows that people don’t care about
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Issues to Ponder
1. Outsourcing to China and India today differs from outsourcing in the past in two
2. The law of one price states that the price of equivalent goods will cost the same
across countries. Reasons why the law of one price might not hold include
3. The normal textbook presentation might not include the international trader
because it complicates the model. How much of the gains go to trader depends on
the cost of facilitating the trade, the competition among traders, and the
4. a. Since the trade would be balanced, the price of the certificates would be zero.
b. In order to import the price would be very high.
c. Since the United States has a trade deficit with China. Chinese companies that
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5. The subgroup of workers that would have likely been most helped are low-wage
manufacturing workers in tradable sectors. They would have had their industries
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