978-1285165905 Chapter 3 Part 2

Unlock access to all the studying documents.

View Full Document

Chapter 3/Interdependence and the Gains from Trade ❖ 41

fish, but if he can trade with natives on the island, he will possibly be able to consume at a

point outside his production possibilities frontier.

Figure 1

2. Crusoe’s opportunity cost of catching one fish is 10 coconuts, since he can gather 10

can catch two per hour, while Crusoe can catch only one per hour. But Crusoe has a

than Friday’s.

3. If the world’s fastest typist happens to be trained in brain surgery, she should hire a

advantage in typing because the secretary would have a lower opportunity cost of typing.

Questions for Review

1. The production possibilities frontier will be linear if the opportunity cost of producing a good

is not produced using specialized inputs.

2. Absolute advantage reflects a comparison of the productivity of one person, firm, or nation to

production of every good.

3. Many examples are possible. Suppose, for example, that Roger can prepare a meal of hot

doing the laundry. For Anita, the opportunity cost of doing the laundry is 12 meals; for

Roger, it is 18 meals.

42 ❖ Chapter 3/Interdependence and the Gains from Trade

4. Comparative advantage is more important for trade than absolute advantage. In the example

5. In order for trade to benefit both parties, the price for the trade must lie between the parties’

opportunity costs.

6. Economists oppose policies that restrict trade among nations because trade allows all

Quick Check Multiple Choice

Problems and Applications

1. a. See Figure 2. If Maria spends all 5 hours studying economics, she can read 100 pages, so

that is the vertical intercept of the production possibilities frontier. If she spends all 5

Figure 2

economics.

Chapter 3/Interdependence and the Gains from Trade ❖ 43

2. a.

Workers needed to make:

One Car

One Ton of Grain

U.S.

1/4

1/10

Japan

1/4

1/5

b. See Figure 3. With 100 million workers and 4 cars per worker, if either economy were

only grain it would produce 500 million tons. These are the intercepts of the production

lines.

Figure 3

table:

Opportunity Cost of:

One Car (in terms of tons

of grain given up)

One Ton of Grain (in

terms of cars given up)

U.S.

2 1/2

2/5

Japan

1 1/4

4/5

44 ❖ Chapter 3/Interdependence and the Gains from Trade

d. Neither country has an absolute advantage in producing cars, because they are equally

productive (the same output per worker); the United States has an absolute advantage

in producing grain, because it is more productive (greater output per worker).

e. Japan has a comparative advantage in producing cars, because it has a lower

opportunity cost in terms of grain given up. The United States has a comparative

advantage in producing grain, because it has a lower opportunity cost in terms of cars

given up.

workers times 5 tons each).

g. From any situation with no trade, in which each country is producing some cars and

some grain, suppose the United States changed one worker from producing cars to

producing grain. That worker would produce 4 fewer cars and 10 additional tons of grain.

will be better off by 2 tons of grain. With the trade and the change of one worker in both

the United States and Japan, each country gets the same amount of cars as before and

3. a. Pat‘s opportunity cost of making a pizza is 1/2 gallon of root beer, because she could

brew 1/2 gallon in the time (2 hours) it takes her to make a pizza. Kris’s opportunity cost

making pizza.

c. The highest price of pizza in terms of root beer that will make both roommates better off

is 2/3 of a gallon of root beer. If the price were higher than that, then Kris would prefer

beer instead of making a pizza) rather than trading for root beer that Kris makes.

4. a. Because a Canadian worker can make either 2 cars a year or 30 bushels of wheat, the

Chapter 3/Interdependence and the Gains from Trade ❖ 45

b. See Figure 4. If all 10 million workers produce 2 cars each, they produce a total of 20

million cars, which is the vertical intercept of the production possibilities frontier. If all 10

million workers produce 30 bushels of wheat each, they produce a total of 300 million

bushels, which is the horizontal intercept of the production possibilities frontier. Because

the trade-off between cars and wheat is always the same, the production possibilities

frontier is a straight line.

If Canada chooses to consume 10 million cars, it will need 5 million workers devoted to

point A on Figure 4.

will be producing at the vertical intercept of the production possibilities frontier.

million more bushes of wheat.

Figure 4

5. a. English workers have an absolute advantage over Scottish workers in producing scones,

because English workers produce more scones per hour (50 vs. 40). Scottish workers

scone production over Scottish workers, who have an opportunity cost of 1/20 sweater

per scone (2 sweaters per hour divided by 40 scones per hour). Scottish workers, who

divided by 1 sweater per hour).

46 ❖ Chapter 3/Interdependence and the Gains from Trade

c. Even if a Scottish worker produced just one sweater per hour, the countries would still

6. a. With no trade, 1 pair of white socks trades for 1 pair of red socks in Boston, because

socks per 1 pair of white socks.

Chicago has a comparative advantage in producing red socks, because the opportunity

cost of producing a pair of red socks in Chicago is 1/2 pair of white socks, while the

c. If they trade socks, Boston will produce white socks for export, because it has the

which is Chicago’s comparative advantage.

d. Trade can occur at any price between 1 and 2 pairs of red socks per pair of white socks.

red socks per pair of white socks) instead of buying them from Boston.

7. a. Gains from trade will be possible when X does not equal 3. Gains from trade are possible

when a comparative advantage exists. The opportunity cost of 1 car in Germany is 200

advantage will exist.

b. Germany will export cars and import wine for all values of X<3. For Germany to export

cars, it must have the comparative advantage in producing cars and France must have

Chapter 3/Interdependence and the Gains from Trade ❖ 47

Germany will have the comparative advantage in cars, export cars and import wine for all

values of X<3.

8. a. The production possibilities frontiers for the two countries are shown in Figure 5. If,

without trade, a U.S. worker spends half of his time producing each good, the United

of computers.

The price of a shirt will fall between 1/5 and 1/10 of a computer. An example would be a

price of 1/7 computer. Suppose China produced only shirts (100 shirts) and exported 50

shirts in exchange for 7.14 computers (50/7 = 7.14). This trade makes China better off

and 50 shirts).

of a shirt for the United States is 1/5 computer. If the price were greater than 10 shirts,

of a computer is 10 shirts.

d. Once the productivity is the same in the two countries, the benefits of trade disappear.

48 ❖ Chapter 3/Interdependence and the Gains from Trade

9. a. True; two countries can achieve gains from trade even if one of the countries has an

absolute advantage in the production of all goods. All that is necessary is that each

country has a comparative advantage in some good.

other thing.

However, the introduction of trade will likely be harmful to domestic auto workers and

manufacturers.