Review Questions: Comparative Advantage

Mankiw: Priciples od Economics

Chap. 3

1

Review Questions: Comparative Advantage

In a situation without trade, what determines the consumption possibilities of an individual or a nation? How would this change with trade?

ANSWER: Without trade, consumption possibilities are absolutely limited by, and equal to, production possibilities. Trade allows an individual or a nation's consumption possibilities to exist at points outside its production possibilities frontiers.

In a two-person, two-good world, could one person have a comparative advantage in both goods? Explain.

ANSWER: No, because a person's opportunity cost of one good is the inverse of the opportunity cost of the other good. Hence, if your opportunity cost of good A is relatively low, giving you the comparative advantage in that good, your opportunity cost of good B will be relatively high, giving the other person the comparative advantage in that good.

Suppose that there are two goods in the world, bread and cheese. Without trade, David can bake 50 loaves of bread in a week. Alternatively, he can make 5 pounds of cheese in a week. Laura can make 20 pounds of cheese in one week, or she can bake 10 loaves of bread in one week. Draw the production possibilities frontiers for David and for Laura, assuming that the frontiers are linear.

ANSWER:

Julia can produce 15 apple pies or 1 dozen croissants in one day. Jacque can produce 2 apple pies or 10 dozen croissants in one day.

a. Draw the production possibilities frontiers for Julia and Jacque. b. What pattern of specialization and trade will benefit both Julia and Jacque?

Mankiw: Priciples od Economics

Chap. 3

2

ANSWER:

a.

b.

The production possibilities frontiers should look something like the graphs shown. Since Julia is so good at producing apple pies, and Jacque is so good at producing croissants, if Julia specializes in producing apple pies and Jacque specializes in producing croissants, total production of apple pies and croissants will increase, and both Julia and Jacque can benefit from the increased production through trade.

George and Martha face these production possibilities frontiers for brownies and cupcakes.

a. If George and Martha choose not to trade and divide their time equally between the production of brownies and cupcakes, how many of each would they be able to consume? (Show this point on your graphs.)

b. Now assume that George and Martha decide to specialize in the good in which they have a comparative advantage and then trade. Who would trade brownies and who would trade cupcakes?

c. If George and Martha decide to trade 60 brownies for 60 cupcakes, how many cupcakes and brownies would each have to consume?

d. How do we know each is better off with trade than acting alone?

Mankiw: Priciples od Economics

Chap. 3

3

John can milk 20 cows or feed 40 calves in one hour. Jared can milk 10 cows or feed 50 calves in one hour.

a. Who has the absolute advantage in milking cows? Who has the absolute advantage in feeding calves?

b. Who has the comparative advantage in milking cows? Who has the comparative advantage in feeding calves?

c. If John and Jared, who have been dividing their time equally between milking and feeding, each specialize in the activity in which he has a comparative advantage, how many additional cows can be milked and calves fed per hour?

Jack and Catherine have a cooperative project which must be completed for a business class. The project involves doing a series of calculations and writing a report. It would take Jack 10 hours to do the required calculation and 10 hours to write the report. It would take Catherine 12 hours to do the calculations and 20 hours to write the report.

a. How much time would it take the two to complete the project if they divide the calculations equally and the writing equally?

b. How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or writing?

c. If Catherine and Jack have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or writing?

Explain the following statement: International trade can make some individuals worse off, even as it makes the country as a whole better off.

ANSWER: Trade makes a country as a whole better off because it allows a country to consume outside its production possibilities frontier, allows for a greater variety of goods and services to be consumed and allows a country to obtain goods at a price lower than its own opportunity cost. However, imports cause an increase in competition which may jeopardize domestic jobs in the short run. Businesses which experience increased competition or a worker who loses his job may be worse off with trade.

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