The Power of Trade & Comparative Advantage

When individuals specialize and trade based on comparative advantage, an improvement in the ability of one individual to produce will benefit who?

Both individuals

Two countries that specialize where they have a comparative advantage and then trade with each other will experience increases in...

wages, total output, and living standards in both countries.

How did Adam Smith explain the observation that civilization often begins near rivers or sea coasts?

The ease of trade over water opened up bigger markets, allowing for more specialization.

What does the theory of comparative advantage help to explain?

Why people trade and which goods they should trade

Comparative Advantage

the ability to produce a good or service at a lower opportunity cost than another

Globalization

the advance of human cooperation across national boundaries.

The buying and selling of goods on eBay provides a great example of the Professor Cowen's point that...

trade makes people better off when preferences differ.

(T/F): Absolute advantage is the source of the potential gains from specialization and trade.

False

In order to understand how specialization and trade according to comparative advantage can lead to more total output, one needs to understand the concept of what?

Opportunity cost

Absolute advantage can be determined by comparing what?

different producers' input requirements per unit of output

Professor Cowen's point that trade makes people better off when preferences differ is...

intuitive but fundamental.

Trade based on comparative advantage allows us to produce and consume more, even if no one ever gets better at producing, simply by...

rearranging who produces what.

Division of Knowledge

people learning different tasks in which they specialize.

Suppose that after specializing and trading, Bob ends up with 5 bananas and 10 fish, while Ann ends up with 5 bananas and 20 fish. Which statement below is true and demonstrates the power of comparative advantage?

As Ann and Bob each get better at producing, they will enjoy more fish and more bananas.

In the Mexico/U.S. example from the video, why was it better to have shirts produced in Mexico?

Because it takes fewer units of labor to produce a computer in the U.S. than in Mexico.

Why does Professor Boudreaux think that it is better to have a common disease than to have a rare disease?

Because the market for the treatment of common diseases is larger. As Adam Smith first told us, the size of the market matters.

Martha Stewart has an absolute advantage in ironing shirts. What does this mean?

Martha Stewart has the absolute disadvantage in other activities, such as running her business.

What does it mean for Martha Stewart to have a comparative advantage in running Martha Stewart Living Omnimedia (MSO)?

Martha Stewart must also have the comparative advantage in other activities, such as ironing.

A gardener can produce either beans or corn in her garden. The gardener's opportunity cost of a bushel of beans multiplied by her opportunity cost of a bushel of corn is equal to...

1

A farmer produces both beans and corn on her farm. If she must give up 16 bushels of corn to be able to get 6 bushels of beans, then her opportunity cost of 1 bushel of beans is

2.67 = (16/6)

Professor Boudreaux's son is alive today in part because of each of the following...

A large number of potential buyers of highly-specialized medical services. Trade based on comparative advantage The existence of medical specialties

What term best describes the situation that, relative to England, France can produce beef at a lower cost of production (i.e., can produce beef using fewer inputs)?

Absolute advantage

David sells his car, which he considers worthless, to Cameron for $200. So...

David and Cameron must have different preferences for the car.

The second benefit of trade is that "trade increases productivity through specialization..." How does the story of Professor Boudreaux and Dr. Bostwick demonstrate this?

Dr. Bostwick has been able to dedicate a lot of time in his life to studying pediatric gastroenterology because he did not also have to dedicate time to raising livestock, harvesting produce, or building shelters.

The first benefit of trade is that "trade makes people better off when preferences differ." How does the story of Professor Boudreaux and Dr. Bostwick demonstrate this?

Dr. Bostwick was able to provide medical services that did not satisfy his own wants, so he exchanged those services for money that he used to buy things that did. Professor Boudreaux had money but desperately wanted medical services, so he exchanged the money for the medical services.

(T/F): A nation will not have a comparative advantage in a product if it does not also have an absolute advantage in the production of that good.

False

(T/F): The process of specialization and trade has positive net benefits and is, therefore, beneficial to everyone.

False

What does medical specialization do?

It increases medical knowledge, which increases medical productivity, which increases medical output. In medicine, increases in knowledge lead to increases in productivity.

The third benefit of trade is that "trade increases productivity through comparative advantage." How does the story of Professor Boudreaux and Dr. Bostwick demonstrate this?

It was more efficient for Professor Boudreaux to continue to work and earn money as an economics professor and to trade for Dr. Bostwick's services than it would have been for him to quit economics and become a pediatric gastroenterologist because economics plays more to his strengths than does medicine.

What happens when a company like eBay achieves a better matching of buyers and sellers?

Lower-valued goods are transformed into higher-valued goods.

As an academic economist, Professor Boudreaux is certainly familiar with performing research. Why didn't he simply perform the research on pediatric gastroenterology necessary to acquire the same level of knowledge as Dr. Bostwick and diagnose his son on his own?

Professor Boudreaux gave up less by continuing to work as an economist and hiring Dr. Bostwick than he would have had to give up to stop working and learn pediatric gastroenterology, and at best the result would have been the same.

Why doesn't Martha Stewart do all of her own ironing?

She has an absolute advantage in ironing.

By the time Tasmania was "discovered" in 1642, why had it become the simplest material culture in the modern world?

Tasmania's isolation had left it unable to trade with the rest of the world.

How does highly specialized medicine increases society's productivity in caring for the sick?

The division of medical knowledge among the brains of many different physicians with different specialties increases society's total amount of medical knowledge. If pediatricians did not further specialize, they would have had to learn about many pediatric specialties, such as pediatric gastroenterology, pediatric hematology and pediatric oncology, which means they would only have been able to learn a little about each one. A physician who specializes in pediatric gastroenterology sees only patients within this specialty, meaning they are exposed to more relevant cases than they would have been had they practiced in pediatrics in general.

In which economy is there more total medical knowledge--one in which all physicians are general practitioners or one in which physicians specialize, and why?

The one in which physicians specialize, because the physician's brains are not all filled with the same medical knowledge, so the total amount of medical knowledge can exceed the medical knowledge contained in just one physician's brain.

According to the theory of comparative advantage, why are wages lower in China than in the United States?

There is lower productivity in China.

How can we get the most value out of the goods that we already have?

Through trade

After Mexico and the United States specialize according to comparative advantage, what happens to total world production of computers and shirts?

Total world production of both computers and shirts increases.

What are the 3 benefits of trade?

Trade makes people better off when preferences differ. Trade increases productivity through specialization and the division of knowledge. Trade increases productivity through comparative advantage.

(T/F): Because physicians often specialize in one part or system of the body, the total combined knowledge of physicians is greater than it would be without specialization.

True

(T/F): Countries specialize in the production of goods for which they have a comparative advantage.

True

(T/F): In terms of productive ability, the greater the difference between two individuals, the greater the benefit from trading with one another.

True

(T/F): It can be mutually beneficial for 2 nations to specialize in goods for which they have a comparative advantage and then trade with one another.

True

(T/F): Specialization and trade raise wages in both countries that are party to the trade.

True

(T/F): Specialization leads to increases in knowledge, which in turn leads to increases in productivity.

True

(T/F): The opportunity cost of painting a house is higher for Alex Rodriguez than for the high school student.

True

(T/F): Trade based on absolute advantage would not occur in a case where one party can outproduce the other in all goods.

True

(T/F): Trade is able to turn diversity into strength.

True

(T/F): Trade will increase aggregate wealth while possibly making some individuals worse off.

True

(T/F): When trading with more developed countries, less developed countries have a comparative advantage in the production of some goods or services.

True

Specialization and trade can decrease the per unit cost of production because...

it creates economies of scale associated with large-scale production

Absolute Advantage

the ability to produce a good using fewer inputs than another producer

The production possibilities frontier shows...

the combinations of outputs a country can produce given its resources and productivity.

The theory of comparative advantage says you should specialize in producing what you can produce at...

the lowest opportunity cost.

Professor Boudreaux's son is alive today NOT because of...

the material his father learned in his college biology class. Quite the contrary: a little bit of knowledge did not save his son's life. Rather, it was a lot of knowledge stored in the brain of someone who specialized in exactly this kind of medicine.