Review Questions

has the absolute advantage in production of sweaters? Who has the absolute advantage in the production of wine? How can you tell? 4 . In Germany it takes three workers to make one television and four workers to make one video camera. In Poland it takes six workers to make one television and 12 workers to make one video camera. a. Who has the absolute advantage in the production of televisions? Who has the absolute advantage in the production of video cameras? How can you tell? b. Calculate the opportunity cost of producing one additional television set in Germany and in Poland. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of televisions? c. Calculate the opportunity cost of producing one video camera in Germany and in Poland. Which country has a comparative advantage in the production of video cameras? d. In this example, is absolute advantage the same as comparative advantage, or not? e. In what product should Germany specialize? In what product should Poland specialize? 5 . How can there be any economic gains for a country from both importing and exporting the same good, like cars? 6 . Table 20.15 shows how the average costs of production for semiconductors (the “chips” in computer memories) change as the quantity of semiconductors built at that factory increases. a. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. How does the curve illustrate economies of scale? b. If the equilibrium quantity of semiconductors demanded is 90,000, can this economy take full advantage of economies of scale? What about if quantity demanded is 70,000 semiconductors? 50,000 semiconductors? 30,000 semiconductors? c. Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers. Quantity of Semiconductors Average Total Cost 10,000 $8 each 20,000 $5 each 30,000 $3 each 40,000 $2 each 100,000 $2 each TABLE 20.15 7 . If the removal of trade barriers is so beneficial to international economic growth, why would a nation continue to restrict trade on some imported or exported products?

Review Questions

8 . What is absolute advantage? What is comparative advantage? 9 . Under what conditions does comparative advantage lead to gains from trade? 10 . What factors does Paul Krugman identify that supported expanding international trade in the 1800s? 11 . Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain. 12 . How does comparative advantage lead to gains from trade? 13 . What is intra-industry trade? 14 . What are the two main sources of economic gains from intra-industry trade? 15 . What is splitting up the value chain? 16 . Are the gains from international trade more likely to be relatively more important to large or small countries?

Critical Thinking Questions

17 . Are differences in geography behind the differences in absolute advantages? 18 . Why does the United States not have an absolute advantage in coffee? 19 . Look at Exercise 20.2. Compute the opportunity costs of producing sweaters and wine in both France and Tunisia. Who has the lowest opportunity cost of producing sweaters and who has the lowest opportunity cost of producing wine? Explain what it means to have a lower opportunity cost. 20 . You just overheard your friend say the following: “Poor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond? 21 . Look at Table 20.9. Is there a range of trades for which there will be no gains? 22 . You just got a job in Washington, D.C. You move into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem? 23 . Does intra-industry trade contradict the theory of comparative advantage? 24 . Do consumers benefit from intra-industry trade? 25 . Why might intra-industry trade seem surprising from the point of view of comparative advantage? 26 . In World Trade Organization meetings, what do you think low-income countries lobby for? 27 . Why might a low-income country put up barriers to trade, such as tariffs on imports? 28 . Can a nation’s comparative advantage change over time? What factors would make it change?

Problems

29 . France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week. a. Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.