1. A country has a comparative advantage if it has a lower ________ cost of producing a good
2. The terms of trade is the rate at which two goods can be ________ for one another.
3. Suppose a country has a comparative advantage in shirts but not computer chips. Workers in the chip industry will be ________ with trade.
4. Trade requires absolute advantage to make both parties better off. ________ (True/False)
5. Finding Comparative Advantage. In one minute, Country B can produce either 1,000 TVs and no computers or 500 computers and no TVs. Similarly, in one minute Country C can produce either 2,400 TVs or 600 computers.
a. Compute the opportunity costs of TVs and computers for each country. Which country has a comparative advantage in producing TVs? Which country has a comparative advantage in producing computers?
b. Draw the production possibilities curves for the two countries.
6. Benefits from Trade. In Country U, the opportunity cost of a computer is 10 pairs of shoes. In Country C, the opportunity cost of a computer is 100 pairs of shoes.
a. Suppose the two countries split the difference between the willingness to pay for computers and the willingness to accept computers. Compute the terms of trade, that is, the rate at which the two countries will exchange computers and shoes.
b. Suppose the two countries exchange one computer for the number of shoes dictated by the terms of trade you computed in part (a). Compute the net benefit from trade for each country
7. Measuring the Gains from Trade. Consider two countries, Tableland and Chairland, each capable of producing tables and chairs. Chairland can produce the following combinations of chairs and tables: All chairs and no tables: 36 chairs per day All tables and no chairs: 18 tables per day Tableland can produce the following combinations of chairs and tables:
All chairs and no tables: 40 chairs per day
All tables and no chairs: 40 tables per day
In each country, there is a fixed trade-off of tables for chairs.
a. Draw the two production possibilities cures, with chairs on the vertical axis and tables on the horizontal axis.
b. Suppose each country is initially self-sufficient and divides its resources equally between the two goods. How much does each country produce and consume?
c. Which country has a comparative advantage in producing tables? Which country has a comparative advantage in producing chairs?
d. If the two countries split the difference between the buyer s willingness to pay for chairs and the seller s willingness to accept, in terms of chairs per table, what are the terms of trade?
e. Draw the consumption possibilities curves.
f. Suppose each country specializes in the good for which it has a comparative advantage, and it exchanges 14 tables for some quantity of chairs. Compute the consumption bundles bundles mean the consumption of tables and chairs for each country.
8. Short-Term Employment Effects. Explain how trade can adversely affect employment in a sector of the economy that is suddenly opened to trade. What is likely to happen in the long run?