Chapter 8 Gains from trade: End-of-Chapter Exercises
Multiple Choice:
#1: Suppose Brazil can produce either 30 million coffee beans or 10 million oranges, and Mexico can produce either 20 million coffee beans or 20 million oranges. If each country specializes in the good for which it has a comparative advantage, which of the following is true?
A) Brazil should specialize in coffee, and Mexico should specialize in oranges.
B) Brazil should specialize in oranges, and Mexico should specialize in coffee.
C) Both should produce an equal amount of each good.
D) There is no comparative advantage in this case.
#2: A country has an absolute advantage in a good if:
A) It trades with another country.
B) It has a comparative advantage in that good
C) It has the lowest opportunity cost of producing the good.
D) It can produce the good using fewer resources than another country.
#3: Suppose Country A can produce either 50 cars or 100 computers with the same resources, while Country B can produce either 30 cars or 90 computers. What is the opportunity cost of producing one car in each country?
A) Country A: 2 computers, Country B: 3 computers
B) Country A: 0.5 computers, Country B: 0.33 computers
C) Country A: 3 computers, Country B: 2 computers
D) Country A: 1 computer, Country B: 2 computers
#4: Using the same data from Question 3, which country has a comparative advantage in producing cars?
A) Country A
B) Country B
C) Both have the same advantage
D) Neither country has an advantage
#5: Suppose Country A can produce either 10 tons of wheat or 20 tons of corn with the same resources, while Country B can produce either 15 tons of wheat or 30 tons of corn. Which country has a comparative advantage in wheat production?
A) Country A
B) Country B
C) Both countries
D) Neither country
#6: What is the main reason countries benefit from trade according to the theory of comparative advantage?
A) They can produce all goods more efficiently than their trading partners.
B) They can specialize in goods for which they have a lower opportunity cost, leading to more total output.
C) They reduce the cost of goods through government subsidies.
D) They can exploit other countries' resources.
#7: Suppose China and India both produce rice and textiles. China can produce either 500 tons of rice or 1000 rolls of textiles, while India can produce either 400 tons of rice or 600 rolls of textiles. Which country should specialize in rice production based on comparative advantage?
A) China
B) India
C) Both should specialize in rice
D) Neither should specialize
Sketch of solution:
#1: Suppose Brazil can produce either 30 million coffee beans or 10 million oranges, and Mexico can produce either 20 million coffee beans or 20 million oranges. If each country specializes in the good for which it has a comparative advantage, which of the following is true?
A) Brazil should specialize in coffee, and Mexico should specialize in oranges.
B) Brazil should specialize in oranges, and Mexico should specialize in coffee.
C) Both should produce an equal amount of each good.
D) There is no comparative advantage in this case.
Answer: A
In order to determine comparative advantage we need to compute opportunity costs. I think it’s easiest just to write out the tradeoff directly phrased as an either-or, then divide both numbers to get a ‘1 to whatever’ ratio:
Brazil can produce 30 C or 10 O
30/30 C or 10/30 O
1 C or 1/3 O
Mexico can produce 20 C or 20 O
20/20 C or 20/20 O
1 C or 1 O
Brazil has the lower opportunity cost (1/3 < 1) of producing coffee so should specialize in coffee while Mexico specializes in oranges.
#2: A country has an absolute advantage in a good if:
A) It trades with another country.
B) It has a comparative advantage in that good
C) It has the lowest opportunity cost of producing the good.
D) It can produce the good using fewer resources than another country.
Answer: D. Absolute advantage measures overall productivity in that good. Whoever is the most productive, other things equal, holds the absolute advantage in that good.
#3: Suppose Country A can produce either 50 cars or 100 computers with the same resources, while Country B can produce either 30 cars or 90 computers. What is the opportunity cost of producing one car in each country?
A) Country A: 2 computers, Country B: 3 computers
B) Country A: 0.5 computers, Country B: 0.33 computers
C) Country A: 3 computers, Country B: 2 computers
D) Country A: 1 computer, Country B: 2 computers
Answer: A
Country A:
50 Cars or 100 Computers
50/50 cars or 100/50 computers
1 car or 2 computers
Country B:
30 cars or 90 computers
30/30 cars or 90/30 computers
1 cars or 3 computers
#4: Using the same data from Question 3, which country has a comparative advantage in producing cars?
A) Country A
B) Country B
C) Both have the same advantage
D) Neither country has an advantage
Answer: A
County A has the lower opportunity cost of producing cars (2 versus 3) hence the comparative advantage in producing cars.
#5: Suppose Country A can produce either 10 tons of wheat or 20 tons of corn with the same resources, while Country B can produce either 15 tons of wheat or 30 tons of corn. Which country has a comparative advantage in wheat production?
A) Country A
B) Country B
C) Both countries
D) Neither country
Answer: D
Country A: 10 W or 20 C
10/10 W or 20/10 C
1 W or 2 C
Country B:
15 W or 30 C
15/15W or 30/15C
1 W or 2 C
Both countries have the same opportunity costs, hence no one holds a comparative advantage.
#6: What is the main reason countries benefit from trade according to the theory of comparative advantage?
A) They can produce all goods more efficiently than their trading partners.
B) They can specialize in goods for which they have a lower opportunity cost, leading to more total output.
C) They reduce the cost of goods through government subsidies.
D) They can exploit other countries' resources.
Answer: B. Specialization of comparative advantage prevents our producers from wasting time making a product for which their costs exceed that of another producer. Hence specialization according to comparative advantage maximizes total joint production.
#7: Suppose China and India both produce rice and textiles. China can produce either 500 tons of rice or 1000 rolls of textiles, while India can produce either 400 tons of rice or 600 rolls of textiles. Which country should specialize in rice production based on comparative advantage?
A) China
B) India
C) Both should specialize in rice
D) Neither should specialize
Answer: A
China: 500 R or 100 T
500/500 R or 100/500T
1 R or 1/5 T
India:
400 R or 600 T
400/400R or 600/400T
1 R or 3/2 T
China has the lower comparative advantage in rice, hence comparative advantage in rice.
Here is a video walk-through for a comparative advantage exercise with numbers: