Trade and Specialization

Flashcards on trade, specialization, and comparative advantage.

Why do people trade?

People trade to benefit from goods or services they value more than what they give up, leading to mutual gains.

If John values an antique lamp at $400 and Brett values it at $520, can they both benefit from trading? What are the total gains from trade?

Yes, they can both benefit. The total gains from trade are $120 ($520 - $400).

If John and Brett agree to a price of $470 for the lamp, what are John's and Brett's surpluses?

John's surplus is $70 ($470 - $400), and Brett's surplus is $50 ($520 - $470).

Alex offers Ryan $100 to do a 4-hour assignment. What can we infer about the marginal value of Alex's and Ryan's time?

Alex values her time at more than $25/hour (since she's willing to pay that much), and Ryan values his time at less than $25/hour (since he accepted the offer).

What are the advantages of specialization and trade in an economy?

Advantages include increased efficiency, higher output, and access to a wider variety of goods and services.

What are the disadvantages of specialization and trade in an economy?

Disadvantages can include dependence on other economies, job displacement in certain sectors, and potential exploitation of resources.

What does it mean for a country to have absolute advantage?

The ability to produce more of a good or service than another country using the same amount of resources

What does it mean for a country to have comparative advantage?

The ability to produce a good or service at a lower opportunity cost than another country.

Country Comparative Advantage: US vs China Cars

The US has the absolute advantage in producing both cars and trucks. China: 25 hours for cars, 25 hours for trucks. US: 20 hours for cars, 10 hours for trucks.

Which country has the absolute advantage in producing trucks?

The US has the absolute advantage in producing trucks because it only takes 10 hours compared to China's 25 hours.

What is the opportunity cost of producing a truck (in terms of cars) for the US?

The opportunity cost of producing a truck for the US is 0.5 cars (10/20).

What is the opportunity cost of producing a truck for China?

The opportunity cost of producing a truck for China is 1 car (25/25).

Who has the comparative advantage in truck production (US vs China)?

The US has the comparative advantage in truck production because its opportunity cost (0.5 cars) is lower than China's (1 car).

What is the opportunity cost of producing a car (in terms of trucks) for the US?

The opportunity cost of producing a car for the US is 2 trucks (20/10).

What is the opportunity cost of producing a car for China?

The opportunity cost of producing a car for China is 1 truck (25/25).

Who has the comparative advantage in car production (US vs China)?

China has the comparative advantage in car production because its opportunity cost (1 truck) is lower than the US's (2 trucks).

Would the US and China benefit from specialization and trade?

Yes, both countries would benefit. The US should specialize in trucks, and China should specialize in cars.

What is an exchange rate that would make both the US and China better off?

An exchange rate between 0.5 and 1 truck per car would benefit both countries. For example, 0.75 trucks per car.

In England, it takes one week of labor to produce 8 yards of cloth or 2 barrels of wine. If there is no trade, what is the price of wine in terms of cloth?

The price of wine in terms of cloth in England is 4 yards of cloth per barrel of wine (8 yards / 2 barrels).

In Portugal, it takes one week of labor to produce 12 yards of cloth or 6 barrels of wine. If there is no trade, what is the price of wine in terms of cloth?

The price of wine in terms of cloth in Portugal is 2 yards of cloth per barrel of wine (12 yards / 6 barrels).

Which country has an absolute advantage in the production of cloth?

Portugal has the absolute advantage in the production of cloth (12 yards vs. England's 8 yards).

Which country has an absolute advantage in the production of wine?

Portugal has the absolute advantage in the production of wine (6 barrels vs. England's 2 barrels).

Which country has a comparative advantage in the production of cloth?

England: Opportunity cost of 1 cloth = 1/4 wine. Portugal: Opportunity cost of 1 cloth = 1/2 wine. England has a comparative advantage in cloth.

Which country has a comparative advantage in the production of wine?

England: Opportunity cost of 1 wine = 4 cloth. Portugal: Opportunity cost of 1 wine = 2 cloth. Portugal has a comparative advantage in wine.