BUSI 101 - Chapter 3

(a)1 Why does economic interdependence allow people to enjoy a much wider range of goods and services than they could produce themselves?

(a)2 Why can voluntary trade make both parties better off even though neither person is helping the other out of generosity?

(a)3 What basic problem of economic organization does the chapter use trade to explain?

(a)5 Under what simple circumstances are the gains from specialization and trade most obvious?

(a)1 Individuals specialize in a relatively narrow range of activities and obtain the rest of what they consume through exchange. Trade therefore allows each person to benefit from the productive abilities of many others rather than being limited to personal production.

(a)2 Each party trades because what is received is worth more to that person than what is given up. Voluntary exchange can therefore serve both parties’ self-interest simultaneously.

(a)3 It explains why individuals and countries become economically interdependent rather than trying to remain self-sufficient.

(a)5 The gains are clearest when each person can produce only one good. Trade then immediately gives both access to goods they could not produce themselves.

(b)5 What information does a production possibilities frontier provide in the Frank-and-Rose example?

(b)5 It shows all combinations of meat and potatoes that the producer can produce with available time and technology.

(c)1 Why are Frank’s and Rose’s production possibilities frontiers straight lines rather than bowed outward?

(c)1 Their opportunity costs are constant. Each hour shifted from one activity to another changes output by the same amount regardless of the starting production mix.

(e)1 What general lesson does the Frank-and-Rose example demonstrate about specialization and consumption possibilities?

(e)4 Why does Rose’s absolute advantage in both goods not imply that Frank has nothing useful to contribute through trade?

(e)1 Specialization and trade can allow consumption combinations that would be impossible for each producer acting alone.

(e)4 What matters for efficient specialization is not who uses fewer inputs absolutely, but who sacrifices less of the alternative good.

(g)1 Why are the opportunity costs of producing the two goods reciprocals of one another?

(g)1 If producing one unit of A costs x units of B, then one unit of B costs 1/x units of A because the same production tradeoff is being viewed in the opposite direction.

(h)1 What rule should determine which good each person specializes in if total production is to increase?

(h)3 Why does increased total production make mutually beneficial trade possible?

(h)1 Each producer should specialize more heavily in the good for which he or she has the comparative advantage.

(h)3 The larger total quantity of goods creates a surplus that can be divided so that both trading partners consume more.

(i)1 What general condition must the price of trade satisfy for both parties to gain?

(i)1 The trade price must lie between the two parties’ opportunity costs.

(j)1 How should you determine whether a proposed trade is beneficial to a particular producer?

(j)1 Compare the trade price of the good with the producer’s opportunity cost of producing it personally. Buying through trade is beneficial if the trade price is lower.

(k)1 What central insight about specialization did Adam Smith emphasize?

(k)2 What major contribution did David Ricardo make to the theory of trade?

(k)4 Why have economists traditionally opposed trade restrictions on the basis of comparative advantage?

(k)5 What is the central economic principle shared by the arguments of Smith and Ricardo?

(k)1 People should avoid producing goods themselves when obtaining them through exchange costs less than producing them personally.

(k)2 Ricardo developed the principle of comparative advantage as the central explanation for gains from specialization and international trade.

(k)4 Trade restrictions prevent specialization and exchange based on comparative advantage and therefore can sacrifice potential gains from trade.

(k)5 Individuals and countries benefit when they specialize according to relative productive advantages and exchange for other goods.

(m)4 What determines which goods a country should tend to import?

(m)5 What are two broad sources from which a country can acquire comparative advantage?

(m)4 They tend to import goods that other countries can produce at lower opportunity cost.

(m)5 Natural endowments such as geography and resources, and acquired capabilities such as education, training, health, experience, and technology.

(o)3 How does international specialization allow both countries to consume beyond what would be possible under self-sufficiency?

(o)3 Specialization raises total production, and trade allows countries to exchange part of that increased output for goods they no longer produce themselves.

(p)1 Why is international trade not necessarily a zero-sum contest in which one country’s gain requires another country’s loss?

(p)2 What important qualification must be added to the claim that comparative advantage makes countries better off through trade?

(p)3 What was the main objective of Canada’s earlier protectionist trade strategy described in the chapter’s news feature?

(p)4 How did Canada’s trade strategy change with the Auto Pact, the Canada-U.S. Free Trade Agreement, and NAFTA?

(p)5 What major benefit and major vulnerability resulted from Canada’s deep integration with the U.S. economy?

(p)1 Comparative advantage allows both countries to increase the total value of what they can consume. One country does not have to become poorer for another to gain.

(p)2 Although the country as a whole can gain, the gains and losses may be distributed unevenly among people and industries within the country.

(p)3 It sought to develop Canadian manufacturing behind high tariffs by replacing imported manufactured goods with domestic production.

(p)4 Canada progressively moved toward deeper integration with U.S. and North American markets by lowering barriers to trade.

(p)5 The benefit was increased trade, investment, employment, and GDP. The vulnerability was very heavy dependence on the U.S. market.