Interdependence and the Gains from Trade I. The Principle of Comparative Advantage (what is the principle of comparative advantage?) A. Opportunity Cost and Comparative Advantage B. Comparative Advantage and Specialization of Trade C. The Price of Specialization of Trade II. Absolute Advantage (what is absolute advantage?) Answer the following questions based on your knowledge on comparative advantage and absolute advantage. 1. Why do people choose to become interdependent as opposed to self-sufficient? 2. Whys is comparative advantage important in determining trade instead of absolute advantage? 3. What are the gains from trade? 4. Why is a restriction of trade likely to reduce material welfare? 5. Suppose a lawyer that earns 2,000 pesos per hour can also type 200 words per minute. Should the lawyer hire a secretary who can only type 50 words per minute? why? 6. Suppose a worker in Germany can produce 15 computers or 5 tons of grain per month. Suppose a worker in Poland can produce 4 computers or 4 tons of grain per month. For simplicity, assume that each country has only one worker. a. Fill out the following table: COMPUTERS GRAIN GERMANY POLAND b. Graph the production possibilities frontier for each country (computers on the Y or vertical axis , and grain on the X or horizontal axis). c. What is the opportunity cost of a computer in Germany? What is the opportunity cost of a ton of grain in Germany? d. What is the opportunity cost of a computer in Poland? What is the opportunity cost of a ton of grain in Poland? e. Which country has the absolute advantage in producing computers? f. Which country has the absolute advantage in producing grain? g. Which country has the comparative advantage in producing computers? h.Which country has the absolute advantage in producing grain? i. Each country should tend toward specialisation in the production of which good? Why? j. What is the range of prices for computers and grain for which both countries would benefit? ( clue: grain must cost less than how many computers to Germany, and computers must cost less than how many ton of grain to Poland) k. Suppose the productivity of a worker in Poland doubles so that a worker can produce 8 computers or 8 tons of grain per month. Which country has the absolute advantage in producing computers? Which country has the absolute advantage in producing grain? l. After doubling the productivity in Poland, which country has a comparative advantage in producing computers? which country has a comparative advantage in producing grain? Has the comparative advantage change? has the material welfare of either country changed?
Interdependence and the
I. The Principle of
A.
B. Comparative Advantage and Specialization of Trade
C. The Price of Specialization of Trade
II.
Answer the following questions based on your knowledge on comparative advantage and absolute advantage.
1. Why do people choose to become interdependent as opposed to self-sufficient?
2. Whys is comparative advantage important in determining trade instead of absolute advantage?
3. What are the gains from trade?
4. Why is a restriction of trade likely to reduce material welfare?
5. Suppose a lawyer that earns 2,000 pesos per hour can also type 200 words per minute. Should the lawyer hire a secretary who can only type 50 words per minute? why?
6. Suppose a worker in Germany can produce 15 computers or 5 tons of grain per month. Suppose a worker in Poland can produce 4 computers or 4 tons of grain per month. For simplicity, assume that each country has only one worker.
a. Fill out the following table:
| COMPUTERS | GRAIN | |
|---|---|---|
| GERMANY | ||
| POLAND |
b. Graph the
c. What is the opportunity cost of a computer in Germany? What is the opportunity cost of a ton of grain in Germany?
d. What is the opportunity cost of a computer in Poland? What is the opportunity cost of a ton of grain in Poland?
e. Which country has the absolute advantage in producing computers?
f. Which country has the absolute advantage in producing grain?
g. Which country has the comparative advantage in producing computers?
h.Which country has the absolute advantage in producing grain?
i. Each country should tend toward specialisation in the production of which good? Why?
j. What is the range of prices for computers and grain for which both countries would benefit?
( clue: grain must cost less than how many computers to Germany, and computers must cost less than how many ton of grain to Poland)
k. Suppose the productivity of a worker in Poland doubles so that a worker can produce 8 computers or 8 tons of grain per month. Which country has the absolute advantage in producing computers? Which country has the absolute advantage in producing grain?
l. After doubling the productivity in Poland, which country has a comparative advantage in producing computers? which country has a comparative advantage in producing grain? Has the comparative advantage change? has the material welfare of either country changed?
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