Econ 203 lesson 3

What must be given up to obtain an item is called

opportunity cost

Belarus has a comparative advantage in the production of linen, but Russia has an absolute advantage in the production of linen. If these two countries decide to trade,

Belarus should export linen to Russia

The principle of comparative advantage does not provide answers to certain questions. One of those questions is

How are the gains from trade shared among the parties to a trade?

Consider two individuals — Howard and Mai — each of whom would like to wear sweaters and eat tasty food. The gains from trade between Howard and Mai are least obvious in which of the following cases?

Howard is very good at knitting sweaters and at cooking tasty food, but Mai's skills in both of these activities are very poor

Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in three hours or he can trim a tree in two hours.

Travis has an absolute advantage over Ricardo in trimming trees.

Tom produces baseball gloves and baseball bats. Steve also produces baseball gloves and baseball bats, but Tom is better at producing both goods. In this case, trade could

benefit both Steve and Tom

Suppose the U.S. and Japan both produce airplanes and televisions and the U.S. has a comparative advantage in the production of airplanes while Japan has a comparative advantage in the production of televisions. If the U.S. exports airplanes to Japan and imports televisions from Japan

both countries, as a whole, will be better off.

The most obvious benefit of specialization and trade is that they allow us to

consume more goods than we otherwise would be able to consume.

Suppose the United States has a comparative advantage over Mexico in producing pork. The principle of comparative advantage asserts that

the United States should produce more pork than what it requires and export some of it to Mexico.

A production possibilities frontier is bowed outward when

the rate of tradeoff between the two goods being produced depends on how much of each good is being produced