chapter 33

The underlying reason why trade benefits both sides of a trading arrangement is rooted in the concept of __________________.

A. opportunity cost

Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16 oranges or 4 apples an hour. If the terms of trade are established as 1 apple for 4 oranges, then:

A. there are no incentives for Beta to engage in international specialization and trade with Alpha.

International trade currently involves about ______________ worth of goods and services thundering around the globe.

B. $20 trillion

When one nation can produce a product at lower cost relative to another nation, it is said to have a(n) __________________ in producing that product.

B. absolute advantage

According to international trade theory, a country should:

B. import goods in which it has a comparative disadvantage.

Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16 oranges or 4 apples an hour. The opportunity cost of producing 1 orange for Alpha and Beta, respectively, are:

C. 0.5 apples; 0.25 apples.

Jethro has a(n) __________________ in all aspects of camping: he is faster at carrying a backpack, gathering firewood, paddling a canoe, setting up tents, making a meal, and washing up.

C. absolute advantage

When nations increase production in their area of _________________ and trade with each other, both sides can benefit.

C. comparative advantage

Assume that one day's labor in Argentina can produce either 20 units of cloth or 2 units of wine, while in Chile one day's labor can produce either 24 units of cloth or 12 units of wine. If Argentina transfers 2 units of labor from wine to cloth and Chile transfers 1 unit of labor from cloth to wine, the increase in combined output by those two workers will be:

D. 8 wine; 16 cloths

Which of the following is true?

D. A nation cannot have a comparative advantage in the production of every good.

_____________________ identifies the area where a producer's absolute advantage is relatively greatest, or where the producer's absolute disadvantage in productivity is relatively least.

D. comparative advantage

Describe "the value chain" and illustrate with an example.

The "value chain" describes how a good is produced in stages; for example, the value chain for making a toaster oven would include making metal, plastic, elements that provide the heat, electrical cords, designing how the parts will fit together, assembly of the toaster ovens, packaging, shipping, and selling in a retail store.

The reasons that nations trade includes the fact that:

A. no one country produces all of what citizens within the country want.

If a nation has a comparative disadvantage in the production of some commodity:

C. it can still gain from international trade in that commodity, by getting it at a lower opportunity cost than if it produced it domestically.

Colombia produces coffee with less labor and land than any other country; it therefore necessarily has:

D. an absolute advantage in coffee production

What matters most in determining the efficient distribution of production over the world is:

D. comparative advantage

Say that Alland can produce 32 units of food per person per year or 16 units of clothing per person per year, but Georgeland can produce 24 units of food per year or 12 units of clothing. Which of the following is true?

A. Alland has an absolute advantage in producing food but will not trade with Georgeland.

Suppose that Canada can produce 100,000 hockey sticks or 10,000 gallons of maple syrup in a typical workweek, while Germany can produce 90,000 hockey sticks or 10,000 gallons of maple syrup in a typical workweek. From these numbers, we can conclude:

A. Canada has a comparative advantage in the production of hockey sticks.

Say that Alland can produce 32 units of food per person per year or 16 units of clothing per person per year, but Georgeland can produce 16 units of food per year or 8 units of clothing. Which of the following is true?

A. Georgeland has a comparative advantage, but not an absolute advantage, in producing clothing.

Say that Alland can produce 32 units of food per person per year or 16 units of clothing per person per year, but Georgeland can produce 36 units of food per year or 18 units of clothing. Which of the following is true?

A. Georgeland has an absolute but not a comparative advantage in producing clothing.

In India one person can produce 330 pounds of rice or 110 shirts in one year. In China one person can produce 400 pounds of rice or 200 shirts in one year. Which of the following statements is true?

A. India has a comparative advantage in the production of rice.

If the USA could produce 1 ton of potatoes or 0.5 tons of wheat per worker per year, while Ireland could produce 3 tons of potatoes or 2 tons of wheat per worker per year, there can be mutual gains from trade if:

A. The USA specializes in potatoes because of its comparative advantage in producing potatoes.

The theory of comparative advantage shows that the gains from international trade do not just result from the absolute advantage of producing at lower cost, but also from pursuing comparative advantage and producing at a lower ________________.

A. opportunity cost

Some nations that seek to produce all of their own needs face the problem that:

A. some industries are too small to be efficient if restricted to their domestic markets alone.

Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16 oranges or 4 apples an hour. If the terms of trade are established as 1 apple for 2 oranges, then:

A. there are no incentives for Alpha to specialize and trade with Beta.

The opportunity cost of producing a pair of pants in the USA is 5 bushels of wheat, while in China, it is 2 bushels of wheat. As a result:

A. there can be mutual gains from trade to the two countries if the USA exports wheat to China in exchange for pants.

The concept of _________________ means that as the measure of output goes up, average costs of production decline—at least up to a point.

B. economies of scale

Alternate Outputs from One Day's Labor Input: USA: 12 bushels of wheat or 3 yards of textiles. India: 3 bushels of wheat or 12 yards of textiles. From the data, the USA:

B. has an absolute advantage over India in the production of wheat.

Intra-industry trade between similar trading partners allows the gains from ______________________ that arise when firms and workers specialize in the production of a certain product.

B. learning and innovation

Trade allows each country to take advantage of _________________ in the other country.

B. lower opportunity costs

The slope of the production possibility frontier is determined by the ________________ of expanding production of one good, measured by how much of the other good would be lost.

B. opportunity cost

Alternate Outputs from One Day's Labor Input: USA: 12 bushels of wheat or 3 yards of textiles. India: 3 bushels of wheat or 12 yards of textiles. The opportunity cost of one bushel of wheat in India is:

C. 4 yards of textiles

As measured in 2008, about _________ of U.S. trade and ________ of European trade is intra-industry trade.

C. 60%; 60%

Suppose that the USA can make 15,000,000 cars or 20,000,000 bottles of wine with one year's worth of labor. France can make 10,000,000 cars or 18,000,000 bottles of wine with one year's worth of labor. From these numbers, we can conclude:

C. The USA has an absolute advantage in the production of cars.

What is comparative advantage, and why is it important in international trade?

Comparative advantage states that aggregate output is maximized when countries specialize in the production of goods for which they are the lowest opportunity cost producer, and then trade for other goods. This explains how countries can improve their situation through trade, rather than producing all goods themselves.

Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16 oranges or 4 apples an hour. Which of the following terms of trade between apples and oranges would allow both Alpha and Beta to gain by specialization and exchange?

D. 1 apple for 3 oranges

Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16 oranges or 4 apples an hour. Which of the following statements is true?

D. If Alpha specializes in growing apples and Beta specializes in growing oranges, they could both gain by specialization and trade.

The idea behind comparative advantage reflects the possibility that one party:

D. may be able to produce something at a lower opportunity cost than another party.

The gains from expanding trade are probably most important for the low-income economies in the world as opposed to the gains though trade benefitting the USA. Why might this be so? Offer at least three different reasons comparing and contrasting the USA economy with that of smaller nations.

In some ways, the giant U.S. economy has less need for international trade, because it can already take advantage of internal trade within its economy. The United States has a variety of different climates, natural resources, and geographic areas where workers are more skilled or less skilled. It is a large enough economy that firms can become extremely specialized and focused on producing small slices of the value chain. In the huge U.S. economy, large firms can take advantage of economies of scale and still compete against each other within the U.S. economy.

Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their economic activity consists of either gathering pineapples or fishing. We know Steve can catch four fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish or harvest two baskets of pineapples. If Steve and Craig don't trade with each other, who is better off? Why?

Steve is better off because he has more fish and the same number of pineapples and works no more time than Craig. Steve has an absolute advantage in fish production. Steve's opportunity cost of a basket of pineapples is 2 fish; his opportunity cost of a fish is 2 basket of pineapples. Lee's opportunity cost of a basket of pineapples is 1 fish; his opportunity cost of a fish is 1 basket of pineapples

Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their economic activity consists of either gathering pineapples or fishing. We know Steve can catch four fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish or harvest two baskets of pineapples. If they each spend four hours a day fishing and four hours a day harvesting pineapples, how many of each will Steve produce? How many will Craig produce? What will their total production be?

Steve produces 16 fish per day (4 hours x 4 fish per hour) and 8 baskets of pineapples (4 hours x 2 baskets per hour). Craig produces 8 fish per day (4 hours x 2 fish per hour) and 8 baskets of pineapples (4 hours x 2 baskets per hour). Total production is 24 fish per day and 16 baskets of pineapples.

Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their economic activity consists of either gathering pineapples or fishing. We know Steve can catch four fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish or harvest two baskets of pineapples. Assume Craig and Steve both operate on straight-line production possibilities curves. What is Steve's opportunity cost of producing a basket of pineapples? Of a producing a fish? What is Craig's opportunity cost of producing a basket of pineapples? Of a producing a fish?

Steve's opportunity cost of a basket of pineapples is 2 fish; his opportunity cost of a fish is 2 basket of pineapples. Lee's opportunity cost of a basket of pineapples is 1 fish; his opportunity cost of a fish is 1 basket of pineapples.

Define "splitting up the value chain." List some factors that have allowed this trend to accelerate in recent years.

Thanks in large part to improvements in technology for communication, sharing of information, and transportation, it has become easier to split up the value chain so that instead of being done in a single large factory, all of these steps can be split up among different firms operating in different places and even different countries.

A skeptic about the gains from global trade might offer up some challenging counterpoint questions regarding trade. Ask at least two questions that counter the numeric benefits of globalization.

What if one nation becomes dependent on the other for oil or food, and then the exporter cuts off the supply? What if oil workers in the United States lose jobs when oil is imported from Saudi Arabia and farmers in Saudi Arabia lose jobs when corn is imported from the United States?

What benefits are to be gained from countries producing according to the concept of comparative advantage? What if a country is absolutely more productive in all goods?

When countries produce according to the concept of comparative advantage, and then trade, the consumption possibilities expand for all countries involved. This is because producing goods for which a country has a comparative advantage means that goods are produced at the lowest relative opportunity cost, thus freeing resources for the production of more goods. Even if a country has an absolute advantage, it will still gain from trade, because it is comparative, not absolute, advantage that determines which countries should produce which goods.

Define the term in economics "absolute advantage" and illustrate with an example.

When one nation can produce a product at lower cost relative to another nation, it is said to have an absolute advantage in producing that product. A worker in Saudi Arabia can produce more oil, by a margin of 6 barrels to 2 barrels. However, a worker in the United States can produce more corn, by a margin of 8 bushels to 1 bushel.