ECN 204 Lecture Notes - Lecture 15: Comparative Advantage, Opportunity Cost, Exchange Rate

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26 Jun 2016

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It is not possible for any economy even one with an absolute advantage in everything to have a comparative advantage in everything. An economy will gain if it specialized in the good which it has a comparative advantage and trade with others for other goods. Principle of comparative advantage= specialization in the production of the good with the lowest opportunity cost. Slope of the frontier shows the opportunity costs mark and majored slide in the midterm find the opportunity cost, 10/5=2 opportunity cost of 5/10, majored 25/2, 2/25, once you know the numbers, mark has advantage in jean, and majored skirts. Specify the range which they can trade. Any combination on the line is possible for them to trade in. A is initial, b is specialization, c is after trading the consumption bundle, there is. The price at which one currency can be exchanged or converted into another currency.

Related Questions

(1) Implicit costs are the opportunity costs of using the resources of ---------------------------------------------

a. outsiders.

b. banks.

c. retained earnings.

d. owners.

(2) The Principle of Comparative Advantage implies that:

a. Two countries can benefit from trade only if one country is better at producing a good compared to another in absolute terms.

b. Two countries can benefit from specialization and trade even if one country is better at one good compared to another in absolute terms.

c. all countries should specialize in whatever they have a higher opportunity cost to producing.

d. all countries are better off when each produces all goods for themselves and they do not trade with each other.

(3) Points inside a production possibilities frontier represent

a. unemployment of resources

b. unattainable production combinations

c. efficient use of resources

d. supply exceeds demand

(4) In a free market --------------------------------

a. governments intervene

b. governments plan production

c. governments interfere

d. prices adjust to reconcile scarcity and desires

crimsonmarten898

For which of the following nations does international trade account for the largest percentage of GDP?
A) Japan
B) The Netherlands
C) Germany
D) Great Britain
E) the United States

2. Suppose that workers in Transylvania can produce only two goods-- yo-yos or sweat socks. The Transylvanian currency is the dealer. In what unit is the opportunity cost of yo-yos measured?
A) dealers
B) dealers per yo-yo
C) dealers per sweat sock
D) yo-yos
E) sweat socks

3. For each watch Denmark produces, it gives up the opportunity to make 50 pounds of cheese. Germany can produce one watch for every100 pounds of cheese it produces. Which of the following is true with regard to opportunity costs in the two countries?
A) The opportunity cost of producing watches is lower in Denmark.
B) The opportunity cost of producing cheese is lower in Denmark.
C) The opportunity cost of producing watches is identical in both countries.
D) It is impossible to compare opportunity costs because the two countries use different currencies.
E) In Germany the opportunity cost of producing one pound of cheese is one watch.

4. For each bow the Romans are producing, they give up the opportunity to make 10 arrows. The Dacians are giving up producing2 bows for every 40 arrows they are producing. Which of the following is true regarding comparative advantage?
A) The Romans have a comparative advantage in producing arrows
B) The Romans have a comparative advantage in producing bows
C) The Romans have a comparative advantage in producing arrows and bows
D) The Dacians have a comparative advantage in producing arrows and bows
E) The Dacians have a comparative advantage in producing bows

5. Which of the following is not a basis for trade between two nations?
A) different skill levels of the labor forces
B) one nation's absolute advantage
C) a difference in tastes between countries
D) economies of scale
E) different capital stocks

6. The opportunity cost of producing one car in Germany is 2,000bushels of wheat, and the opportunity cost of producing one car in Canada is 1,200 bushels of wheat. The two countries can realize mutual gains from trade if they agree on terms of trade that are
A) greater than 2,000 bushels of wheat per car
B) less than 1,200 bushels of wheat per car
C) greater than 1,200 bushels of wheat per car and less than 2,000bushels of wheat per car, and Germany produces wheat
D) greater than 1,200 bushels of wheat per car and less than 2,000bushels of wheat per car, and Germany produces cars
E) greater than 1,200 bushels of wheat per car and less than 2,000bushels of wheat per car, and each country produces both goods

7. The rate at which two countries trade one good for another
A) is known as the foreign exchange rate
B) is known as the terms of trade
C) is known as the export line
D) equals the slope of the import line
E) equals the common slope of the countries' production possibilities frontiers

8. Which of the following is true?
A) International trade makes it possible for a country's consumption possibilities to exceed its production possibilities.
B) International trade requires that a country's production possibilities exceed its consumption possibilities.
C) A country's production possibilities always equal its consumption possibilities.
D) A country's consumption possibilities can never equal its production possibilities because of leakages in the system.
E) As long as there is full employment of resources, a country's production possibilities will exceed its consumption possibilities even with trade.

9. Which of the following is not a reason for international specialization?
A) some countries have educated, trained workers, while other countries have unskilled workers
B) tastes and preferences tend to be different in different countries
C) economies of scale can allow larger, specialized producers to operate at a lower average cost
D) mineral resources are often concentrated in particular countries
E) the world price of a good is determined by the world supply and demand for it

10. Ad valorem tariffs on imports are based on a percentage of an import's value; specific tariffs are based on a lump sum per physical unit imported.
A) True
B) False

raspberrychimpanzee903

3. Gains from trade

Consider two neighboring island countries called Felicidad and Arcadia. They each have 4 million labor hours available per month that they can use to produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor.

Country	Jeans	Rye
Country	(Pairs per hour of labor)	(Bushels per hour of labor)
Felicidad	8	32
Arcadia	12	24

Initially, suppose Arcadia uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce rye, while Felicidad uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce rye. Consequently, Felicidad produces 24 million pairs of jeans and 32 million bushels of rye, and Arcadia produces 12 million pairs of jeans and 72 million bushels of rye. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of jeans and rye it produces.

Felicidad's opportunity cost of producing 1 pair of jeans is _____ of rye, and Arcadia's opportunity cost of producing 1 pair of jeans is _____ of rye. Therefore, _____ has a comparative advantage in the production of jeans, and ____ has a comparative advantage in the production of rye.

Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces jeans will produce ______ millions pairs per month, and the country that produces rye will produce ______ millions bushels per month.

In the following table, enter each country's production decision on the third row of the table (marked "Production").

Suppose the country that produces jeans trades 26 million pairs of jeans to the other country in exchange for 78 million bushels of rye.

In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption."

When the two countries did not specialize, the total production of jeans was 36 million pairs per month, and the total production of rye was 104 million bushels per month. Because of specialization, the total production of jeans has increased by ____ million pairs per month, and the total production of rye has increased by _____ million bushels per month.

Because the two countries produce more jeans and more rye under specialization, each country is able to gain from trade.

Calculate the gains from tradeâthat is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").

	Felicidad		Arcadia
	Jeans	Rye	Jeans	Rye
	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)
Without Trade
Production	24	32	12	72
Consumption	24	32	12	72
With Trade ? ? ? ?
Production	?	?	?	?
Trade action	?	?	?	?
Consumption	?	?	?	?
Gains from Trade ? ? ? ?
Increase in Consumption	?	?	?	?

ECN 204 Lecture Notes - Lecture 15: Comparative Advantage, Opportunity Cost, Exchange Rate

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