Question 1

One reason trade benefits both parties is that it allows each to specialise in what they do better.

Accepted Answer

By trading with one another, countries can focus on producing the goods and services they are relatively better at producing, while importing what they are relatively less efficient at producing. This leads to higher overall efficiency and economic growth for both parties involved in the trade.

Question 2

A constant trade-off in the production of two goods implies that the production possibility frontier will be a curve rather than a straight line.

Accepted Answer

A constant trade-off in the production of two goods implies that the production possibility frontier (PPF) will be a straight line, indicating constant opportunity costs for producing one good over another.

Question 3

The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

Accepted Answer

This statement is a correct definition of comparative advantage. The producer who can produce a good at a lower opportunity cost (in terms of forgoing production of other goods) has a relative efficiency advantage over another producer, and should thus specialize in producing that good to maximize overall output and efficiency in the economy.

Question 4

People's motivation to trade comes from the goods or services they expect to get in return.

Accepted Answer

This is because people trade with the expectation of receiving something of value in return, whether it be goods or services. Without the promise of such a benefit, there would be little motivation for individuals to engage in trade.

Question 5

It takes Barbara four hours to make a pie and four hours to make a shirt. It takes Gary two hours to make a pie and five hours to make a shirt. Barbara should specialise in making shirts and Gary should specialise in making pies. Then they should trade.

Accepted Answer

Barbara's opportunity cost of making a shirt is one pie, while Gary's opportunity cost of making a pie is 2.5 shirts. This means that Barbara has a comparative advantage in making shirts and Gary has a comparative advantage in making pies. By specializing in their respective areas of comparative advantage and trading with each other, they can both benefit and increase their overall production.

Question 6

The principle of absolute advantage explains the gains from trade and why economic interdependence occurs.

Accepted Answer

The principle of comparative advantage, not absolute advantage, explains the gains from trade and why economic interdependence occurs. It shows how countries can benefit from trading even if one country can produce everything more efficiently than another.

Question 7

Rusty can edit two pages in one minute, and can type 80 words in one minute. Emily can edit one page in one minute and can type 100 words in one minute. Rusty has both an absolute and a comparative advantage in editing and Emily has both an absolute and a comparative advantage in typing.

Accepted Answer

Rusty has an absolute advantage in editing because he can edit two pages in the same time that Emily can edit one. He also has a comparative advantage in editing because his opportunity cost of editing is lower than Emily's as he could have typed 80 words in the same minute. Emily has an absolute advantage in typing because she can type 100 words in one minute, while Rusty can only type 80 words in one minute. She also has a comparative advantage in typing because her opportunity cost of typing is lower than Rusty's as she could have edited one page in the same minute.

Question 8

Trade is not based on absolute advantage; rather it is based on comparative advantage.

Accepted Answer

Trade is based on comparative advantage, which means that each country specializes in producing and exporting the goods that it can produce most efficiently at a lower opportunity cost compared to other goods. This allows for both countries to benefit from trade and overall global efficiency and welfare to increase. Absolute advantage, on the other hand, refers to a country's ability to produce a good more efficiently compared to another country.

Question 9

Suppose it takes Jean four hours to catch 10 fish and one hour to collect one kilogram of mushrooms. It takes Lee four hours to catch 10 fish and 30 minutes to collect 1 kg of mushrooms. Lee should specialise in catching fish and Jean should specialise in collecting mushrooms.

Accepted Answer

The statement is incorrect. Lee should specialize in collecting mushrooms and Jean should specialize in catching fish based on the time taken by each person for each task. Lee takes less time to collect mushrooms, and Jean takes less time to catch fish.

Question 10

If trade is not possible, then each person's production possibility frontier is the same as each person's consumption possibility frontier.

Accepted Answer

If trade is not possible, individuals can only consume what they produce. Therefore, their production possibility frontier becomes the same as their consumption possibility frontier.

Question 11

Shaquille can score 32 points or produce 12 rebounds in one game. Karl can score three points or produce one rebound in one game. Shaquille has both an absolute and a comparative advantage in both scoring and rebounding.

Accepted Answer

While Shaquille has an absolute advantage in both scoring and rebounding due to his higher output in both categories, comparative advantage is determined by who has the lower opportunity cost in producing one good over the other. Without knowing their opportunity costs, we cannot definitively say Shaquille has a comparative advantage in both.

Question 12

Suppose Aaron can build a table in three days and clean a house in one hour, while Jack can clean a house in three hours but it only takes him one day to build a table. Jack has an absolute advantage over Aaron.

Accepted Answer

Jack has an absolute advantage in building tables because he can do it faster (in one day compared to Aaron's three days), but Aaron has an absolute advantage in cleaning houses since he can do it in one hour compared to Jack's three hours. Absolute advantage refers to the ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

Question 13

If one country can produce all goods more cheaply than another, there is no reason to trade.

Accepted Answer

The theory of comparative advantage holds that even if one country can produce all goods more cheaply than another, it is still beneficial for both countries to trade. This is because each country can specialize in producing goods that they have a comparative advantage in, and by trading with each other, they can both benefit from the increased efficiency and lower costs that result.

Question 14

As long as two people have different opportunity costs, each can gain from trade by being able to obtain a good at a price lower than his or her opportunity cost.

Accepted Answer

This statement is true. When two people have different opportunity costs, they can specialize in producing the good in which they have a lower opportunity cost and trade with each other to obtain the good they have a higher opportunity cost producing at a lower price than if they were to produce it themselves. This allows them to both gain from trade by increasing their overall consumption possibilities.

Question 15

For a country producing two goods, the opportunity cost of one good will be the inverse of the opportunity cost of the other good.

Accepted Answer

This statement is a simplified version of the principle of comparative advantage, which states that a country should specialize in the production of goods or services where it has a lower opportunity cost compared to other countries. In other words, the opportunity cost of one good is the inverse of the opportunity cost of the other good, meaning that there is a tradeoff between producing one good over the other. By specializing in the good with a lower opportunity cost, a country can produce more of both goods and achieve higher levels of economic growth and welfare.

Question 16

Two individuals or two nations can benefit from trade even if one country has an absolute advantage over the other in producing all goods.

Accepted Answer

Even if one country has an absolute advantage over the other in producing all goods, they can still benefit from trade as they can specialize in producing the goods they have a comparative advantage in and trade with the other country for goods they don't produce efficiently. This can lead to increased efficiency, lower costs, and increased welfare for both countries.

Question 17

Comparative advantage will always occur when two parties have different opportunity costs in production.

Accepted Answer

According to the principle of comparative advantage, if two parties have different opportunity costs in production, then they can benefit from specializing in the production of the goods or services they can produce at a lower opportunity cost and trade with each other. This results in an overall increase in efficiency and production. Thus, comparative advantage will always occur when two parties have different opportunity costs in production.

Question 18

Differences in opportunity cost and comparative advantage allow for gains from trade.

Accepted Answer

Differences in opportunity cost and comparative advantage mean that two countries can both benefit from trade by specializing in the production of goods for which they have a comparative advantage and trading with each other. This leads to increased efficiency, increased output, and lower prices for consumers.

Question 19

Trade allows a country to pivot outwards its production possibilities frontier.

Accepted Answer

Trade allows a country to consume beyond its production possibilities frontier by specializing in the production of goods for which it has a comparative advantage and trading for others, but it does not shift the country's production possibilities frontier itself.

Question 20

Lee can pick 30 apples in one hour. He can pick 60 kiwifruit in half an hour. The opportunity cost to Lee of picking one apple is four kiwifruit.

Accepted Answer

The opportunity cost of picking one apple for Lee is two kiwifruits, since he can pick 60 kiwifruits in half an hour (equivalent to 120 kiwifruits in one hour), and 30 apples in one hour, making the ratio 120:30 or 4:1 kiwifruits to apples. Therefore, for every apple picked, Lee forgoes picking 4 kiwifruits, not the other way around.

Quiz 3: Interdependence and the Gains From Trade