Question 1

How does trade benefit the two parties involved?

Accepted Answer

Trade benefits both parties involved to some extent, but the benefits may not always be equal. Both parties have something to gain from the transaction, or they would not engage in trade in the first place. However, the gains may be greater for one party than the other, depending on the circumstances. For example, if a buyer urgently needs a product and the seller has a monopoly on it, the seller may be able to charge a higher price and benefit more from the trade. On the other hand, if there is competition among sellers, the buyer may be able to negotiate a better price and benefit more from the trade. Therefore, while trade generally benefits both parties, the extent of the benefit may vary.

Question 2

What happens when countries specialize according to their comparative advantage?

Accepted Answer

When countries specialize according to their comparative advantage, they produce the goods that they are most efficient at producing, and trade with other countries for the goods that they are less efficient at producing. This leads to an increase in overall world output of all goods, as countries are producing at maximum efficiency and utilizing their resources effectively. Therefore, option A is the best choice.

Question 3

How is absolute advantage found?

Accepted Answer

Absolute advantage is found by comparing the productivity of one nation to that of another. It is determined by looking at which country can produce more of a given product using the same amount of resources. This means that the country with the highest productivity is said to have an absolute advantage in producing that good.

Question 4

Why does total output in an economy increase when each person specializes?

Accepted Answer

When each person specializes in producing the product for which they have a comparative advantage, they become more efficient and productive in that area. This leads to an increase in the overall output of the economy. Specialization allows each person to focus on what they do best, leading to a more efficient use of resources and increased production.

Question 5

Egypt has a comparative advantage in the production of linen and an absolute advantage in the production of beer, compared to Russia. If these two countries decide to trade, what would the pattern of trade be?

Accepted Answer

Egypt has a comparative advantage in the production of linen, meaning it can produce linen at a lower opportunity cost than Russia. Russia does not have a comparative advantage in any product, including linen or beer. Therefore, Egypt should specialize in producing linen and export it to Russia while importing beer from Russia. This will lead to mutual gains from trade as both countries can consume more linen and beer at a lower opportunity cost.

Question 6

Suppose a producer can produce shirts with lower opportunity cost than jeans. What else do we need to know if we want to determine this producer's comparative advantage?

Accepted Answer

In order to determine the producer's comparative advantage, we need to compare their opportunity cost with other producers in the market. Therefore, we need to know how this producer's opportunity cost compares with other producers' opportunity costs.

Question 7

Which of the following does trade NOT allow for?

Accepted Answer

While trade can bring overall benefits and increase efficiency in resource allocation, it does not necessarily guarantee that all individuals within trading countries will benefit equally. Some individuals or industries may experience job losses or decreased competitiveness as a result of trade.

Question 8

Antonio and Elyse are two woodworkers who both make kitchen cabinets and bathroom vanities. In one month, Antonio can make 12 kitchen cabinets or 36 bathroom vanities, where Elyse can make 10 kitchen cabinets or 50 bathroom vanities. What is the opportunity cost of 1 bathroom vanity?

Accepted Answer

The opportunity cost of producing 1 bathroom vanity for Antonio is 1/36 of a kitchen cabinet, since he can make 36 bathroom vanities instead of 12 kitchen cabinets in the same amount of time. This simplifies to 1/3 of a kitchen cabinet. For Elyse, the opportunity cost of producing 1 bathroom vanity is 1/50 of a kitchen cabinet, since she can make 50 bathroom vanities instead of 10 kitchen cabinets. This simplifies to 1/5 of a kitchen cabinet. Therefore, the correct answer is 1/3 kitchen cabinet for Antonio and 1/5 kitchen cabinet for Elyse.

Question 9

Antonio and Elyse are two woodworkers who both make kitchen cabinets and bathroom vanities. In one month, Antonio can make 12 kitchen cabinets or 36 bathroom vanities, where Elyse can make 10 kitchen cabinets or 50 bathroom vanities. Who has a comparative advantage in which product?

Accepted Answer

Antonio's opportunity cost of making one kitchen cabinet is 3 bathroom vanities (36/12), while Elyse's is 5 bathroom vanities (50/10). Therefore, Antonio has a comparative advantage in kitchen cabinets because he gives up fewer bathroom vanities to make one. Conversely, Elyse has a comparative advantage in bathroom vanities because she gives up fewer kitchen cabinets to make one (her opportunity cost in terms of kitchen cabinets is lower).

Question 10

What is the opportunity cost of an item?

Accepted Answer

Opportunity cost refers to the value of the next best alternative that is forgone as a result of making a decision. It is what you give up to get that item, not necessarily related to the time spent earning money or the dollar value of the item.

Question 11

What is the term that means whatever must be given up to obtain an item?

Accepted Answer

Opportunity cost refers to the cost of the next best alternative that must be foregone in order to pursue a certain action or decision. It is the cost of what you give up in order to obtain something else.

Question 12

Suppose a producer requires a smaller quantity of inputs to produce carrots than to produce onions. Is this information sufficient to determine in which good the producer has a comparative advantage?

Accepted Answer

Comparative advantage cannot be determined solely by the quantity of inputs required for one producer; it requires comparing the opportunity costs of producing goods between different producers. Information about how other producers use their resources is necessary to establish comparative advantage.

Question 13

Both Canada and the U.S. can produce equally tasty maple syrup. What determines which country will export maple syrup?

Accepted Answer

The country with the lower opportunity cost of producing maple syrup will specialize in its production and export it. Opportunity cost is the key concept in comparative advantage, which determines trade patterns.

Question 14

Antonio and Elyse are two woodworkers who both make kitchen cabinets and bathroom vanities. In one month, Antonio can make 12 kitchen cabinets or 36 bathroom vanities, where Elyse can make 10 kitchen cabinets or 50 bathroom vanities. Who has an absolute advantage in which product?

Accepted Answer

Antonio has an absolute advantage in kitchen cabinets as he can make 12 while Elyse can make only 10. Elyse has an absolute advantage in bathroom vanities as she can make 50 while Antonio can only make 36. Therefore, the best answer is D as Antonio has an absolute advantage in kitchen cabinets and Elyse has an absolute advantage in bathroom vanities.

Question 15

What should a country do if it has a comparative advantage in a product?

Accepted Answer

If a country has a comparative advantage in a product, it means that it can produce that product at a lower opportunity cost than other countries. Therefore, the country should export that product and specialize in its production, earning a higher income from selling it on the global market.

Question 16

Assume that South Korea has a comparative advantage in televisions and India has a comparative advantage in clothes. What will happen if these two countries specialize and trade according to their comparative advantage?

Accepted Answer

When countries specialize and trade according to their comparative advantage, they produce more of the goods for which they have a comparative advantage. India, having a comparative advantage in clothes, will produce more clothes than televisions in the absence of trade.

Question 17

What does comparative advantage reflect?

Accepted Answer

Comparative advantage reflects the relative opportunity cost, which is the cost of producing one unit of a good or service measured in terms of the amount of production of another good or service that must be sacrificed.

Question 18

Antonio and Elyse are two woodworkers who both make kitchen cabinets and bathroom vanities. In one month, Antonio can make 12 kitchen cabinets or 36 bathroom vanities, where Elyse can make 10 kitchen cabinets or 50 bathroom vanities. What is the opportunity cost of 1 kitchen cabinet?

Accepted Answer

The opportunity cost of 1 kitchen cabinet for Antonio is 36 bathroom vanities / 12 kitchen cabinets = 3 bathroom vanities. For Elyse, it's 50 bathroom vanities / 10 kitchen cabinets = 5 bathroom vanities.

Question 19

Which of the following would NOT occur if each person specializes in the good for which they have a comparative advantage?

Accepted Answer

If each person specializes in the good for which they have a comparative advantage, their production of that good will increase, but their production of other goods will decrease. As a result, their individual production possibilities frontier will not shift outward, but rather will move along the same curve.

Question 20

Spain and Germany can both produce fish and cars. Spain has a comparative advantage in cars, but Germany has an absolute advantage in cars. What would Germany import from Spain?

Accepted Answer

Although Germany has an absolute advantage in producing cars, Spain has a comparative advantage in producing cars. This means that Spain can produce cars at a relatively lower opportunity cost compared to producing fish. Therefore, Germany would import cars from Spain as it would be relatively cheaper for Spain to produce them.

Quiz 3: Interdependence and the Gains From Trade