CHAP-1-TCQT

Country A can produce 10 yards of textiles or 6 pounds of food per unit of
input. Compute the opportunity cost of producing one additional unit of

food instead of textiles. 1.67 yards of textiles per pound of food
The gains from trade are likely realized in the long run when
workers and firms have had the time to adjust to the new
competitive environment.
Restrictions or impediments to free trade include such things as. all of

the options (import quotas.import tariffs. costly transportation)
Suppose that country A is twice as good at producing widgets as country
B. If the currency of
B is twice as valuable as the currency of A, the comparative advantage
could be canceled out.
Comparative advantage all of the options (is also known as relative

efficiency.can lead to trade even in the face of absolute efficiency. exists
when one party can produce a good or service at a lower opportunity cost
than another party)

input. Country B can produce 8 yards of textiles or 5 pounds of food per
unit of input. Which of the following statements is true? Country A is
relatively more efficient than Country B in the production of
textiles.
Underlying the theory of comparative advantage are assumptions

regarding free trade between nations and that the factors of
production (land, labor, capital, and entrepreneurial ability) are
relatively immobile.
If one country is twice the size of another country and is better at making
almost everything than the benighted citizens of the smaller county, the
bigger county enjoys an absolute advantage.

input. Country B
can produce 8 yards of textiles or 5 pounds of food per unit of input.
Country B is relatively more efficient than Country A in the
production of food, but Country A has an absolute advantage over
Country B in the production of food and textiles.

input. Country B
can produce 8 yards of textiles or 5 pounds of food per unit of input. all of
the options (Country A is relatively more efficient than Country B in the
production of textiles/Country B is relatively more efficient than Country A
in the production of food/Country A has an absolute advantage over
Country B in the production of food and textiles)
Countries A and B currently consume 400 units of food and 400 units of
textiles each and
currently do not trade with one another. The citizens of country A have to
give up one unit of
food to gain two units of textiles, while the citizens of country B have to
give up one unit of
textiles to gain two units of food. Their production possibilities curves are
shown. Under the theory of comparative advantage.The citizens of
country A should make textiles and trade with the citizens of
country B for food.
Counties A and B currently consume 400 units of food and 400 units of
textiles each and
currently do not trade with one another. The citizens of country A have to
give up one unit of
food to gain two units of textiles, while the citizens of country B have to
give up one unit of
textiles to gain two units of food. Their production possibilities curves are
shown.
- Under the theory of comparative advantage, if free trade is allowed,
the market clearing price (or exchange rate, if you will) between
food and textiles will be somewhere between one unit of food
for two units of textiles and two units of food for one unit of
textiles.
- Suppose that trade is allowed and that the international exchange
rate between food and textiles is one-for-one. The increased
consumption following trade will be an increase of 400 units of
food and 400 units of textiles.
In modern times, it is not a country per se but rather a controller of capital

and know-how that gives the country in which it is domiciled a
comparative advantage over country. These controllers of capital and
technology are the multinational corporations (MNCs).
International trade is an "increasing-sum" game at which all players

become winners.
The doctrine of comparative advantage was first put forth by David
Ricardo.
The comparative advantage argument in free trade ignores the cost of

readjustment.
If you can make a good product at a low opportunity cost, you would be
well served to produce that good and trade for other goods.
A country like North Korea likely rejects the notion of increased
opportunity presented by free trade.
The table below shows the bushels of wheat and the bottles of beer that
North and South
Dakota can produce per day of labor under two different hypothetical
situations (Cases I and II).
- Which state has an absolute advantage in producing wheat in Case I ?

South Dakota
- Which state has an absolute advantage in producing beer in Case I?
North Dakota
- Which state has an absolute advantage in producing beer in Case II?
South Dakota
- Which state has a comparative advantage in producing beer in Case I?
North Dakota
- Which state has a comparative advantage in wheat production in Case
I? South Dakota
- Which state has a comparative advantage in wheat production in Case
II?South Dakota
The table below shows the bushels of wheat and the bottles of beer that
North and South
Dakota can produce per day of labor under two different hypothetical
situations (Cases I and II).
- What is the relative price of wheat in North Dakota prior to trade in

Case II? 1 bushel of wheat = 2 bottles of beer.
- For case II, in what range must the "international" price of wheat fall?
(i.e., if North and South Dakota trade only with each other, what is the
possible range of prices?) Between 1 bushel of wheat = 4/3
bottles of beer and 1 bushel of wheat = 2 bottles of beer
For case II, let the international price be 1 bottle = 1 bushel. Derive South
Dakota's "trading possibilities curve." Option C
For case II, let the international price be 1 bottle = 1 bushel. Derive North
Dakota's "trading possibilities curve." Option D
The first two columns give the maximum daily amounts of beer and
whiskey that Southern
Ireland and Northern Ireland can produce when they completely specialize
in one or another
product. The last two columns give each country's consumption without
trade.
- What is the price of beer without trade in Southern Ireland? 2 bottles

of whiskey = 3 kegs of beer
- What is the price of beer without trade in Northern Ireland? 2 bottles
of whiskey = 1 keg of beer
- In which product does Northern Ireland have a comparative advantage
in producing? Whiskey
- Suppose that trade occurs. Each country completely specializes and
500 kegs of beer are traded for 500 bottles of whiskey. What is the
international price of beer? 1 bottle of whiskey = 1 keg of beer
- What is the cost of Northern Ireland producing one additional bottle of
whiskey? 0.33 kegs of beer
- Is Northern Ireland better off when it trades with Southern Ireland?
FALSE
- What is the increased number of goods available in Northern Ireland
after trade? 400 more bottles of whiskey and 200 more kegs of
beer
Suppose that Northern Ireland and Southern Ireland each have 1,000 hours of labor per day.
Southern workers are paid €1 per day and Northern workers are paid £1 per day. What is the
approximate exchange rate associated with an international price of one keg of beer = 1 bottle
of whiskey? €1.14 = £1
- Now suppose that Southern workers receive a raise to €2 per day. Will
trade be possible at the exchange rate you found? FASLE
- Now suppose that Southern workers are paid €1 per day but the
Northern workers receive a raise to £2 per day. Will trade be possible
at the exchange rate you found? FALSE
Consider a dentist and a 14-year old boy. The dentist can make $100 per
hour drilling teeth
and the 14-year old boy can make $2 per hour picking up used aluminum
cans. The dentist is a manly man and can mow his half-acre lot in one
hour. The 14-year old boy can mow the lawn in two hours. If the dentist
hires the boy to mow his lawn at any price less than $100, but more than
$4 both he and the boy are better off.
Consider the no-trade input/output situation presented in the following

table and graph for South and North Carolina. Assume that free trade is
legal.
- Which state is better at making guns? South Carolina

- How much does it cost for North Carolina to produce one gun? 3
pounds of butter
- What is the relative price of a gun in terms of butter in South Carolina?
1 gun costs 2 pounds of butter
- What is the relative price of a pound of butter in terms of guns in
North Carolina? 1 pound of butter costs 0.33 guns.

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Country A can produce 10 yards of textiles or 6 pounds of food per unit of

input. Compute the opportunity cost of producing one additional unit of

Restrictions or impediments to free trade include such things as. all of

Comparative advantage all of the options (is also known as relative

Country A can produce 10 yards of textiles or 6 pounds of food per unit of

Underlying the theory of comparative advantage are assumptions

Country A can produce 10 yards of textiles or 6 pounds of food per unit of

Country A can produce 10 yards of textiles or 6 pounds of food per unit of

In modern times, it is not a country per se but rather a controller of capital

International trade is an "increasing-sum" game at which all players

The comparative advantage argument in free trade ignores the cost of

- Which state has an absolute advantage in producing wheat in Case I ?

- What is the relative price of wheat in North Dakota prior to trade in

- What is the price of beer without trade in Southern Ireland? 2 bottles

Consider the no-trade input/output situation presented in the following

- Which state is better at making guns? South Carolina

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