ECO 1104 Lecture Notes - Lecture 3: Autarky, Absolute Advantage, Comparative Advantage

PART B – Questions 10 – 27 Use the following assumptions to answer all questions: • There are three countries – Argentina, Britain and Canada. • Each country produces and consumes two kinds of goods – crude oil and beef. • All countries make their goods from a single type of input – labor – and each country has 700 hours of labor available to produce crude oil and beef. • Each country demands 5 (five) barrels of crude oil. This assumption simply means that a country must have exactly 5 barrels of crude oil – it may produce them domestically, it may import them from abroad, or it makes some domestically and imports the rest. • Countries produce goods using the technology described in the table below Technology Hours of labor needed to produce one unit of good Using the above assumptions, answer the following questions: • Calculate the quantities of crude oil and beef produced in each country in autarky (when they do not trade and each country produces its own crude oil and beef) • Order the countries according to their absolute advantage in production of crude oil • Order the countries according to their absolute advantage in production of beef • Consider the case where countries are free to specialize and trade. In the table below calculate each country’s opportunity cost of producing one unit of each good. • Calculate the quantities of crude oil and beef produced in each country, consistent with the country’s comparative advantage. Based on the above calculations, answer questions 10 through 27: Consider autarky, when countries do not trade and each country produces its own crude oil and beef. 10. In autarky, Argentina produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 11. In autarky, Britain produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 12. In autarky, Canada produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 13. In autarky, Argentina produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 14. In autarky, Britain produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 15. In autarky, Canada produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 16. Country of _____ has absolute advantage in production of crude oil. a. Argentina b. Britain c. Canada d. No country 17. Country of _____ has absolute advantage in production of beef. a. Argentina b. Britain c. Canada d. No country Consider effects of specialization, when countries are allowed to trade. 18. When countries specialize, Argentina produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 19. When countries specialize, Britain produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 20. When countries specialize, Canada produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 21. When countries specialize, Argentina produces _____ pounds of beef. a. 0 b. 700 c. 150 d. 400 22. When countries specialize, Britain produces _____ pounds of beef. a. 0 b. 700 c. 150 d. 400 23. When countries specialize, Canada produces ____ pounds of beef. a. 0 b. 700 c. 150 d. 400 24. Country of __C___ has comparative advantage in production of crude oil. a. Argentina b. Britain c. Canada d. No country 25. Country of ___A__ has comparative advantage in production of beef. a. Argentina b. Britain c. Canada d. No country 26. Countries gain from trade because specialization increases ____. a. Trade deficit b. Unemployment c. Efficiency d. Inflation 27. Countries should trade with trading partners that _____. a. Are equally technologically advanced b. Use superior technology in every industry c. Use less advanced technology in every industry d. Use different technologies, because trade benefits all

(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

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.

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 trade—that 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").