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Chapter 20: Q. 14 (page 494)
What are the two main sources of economic gains from intra-industry trade?
The two main sources of economic gains from intra-industry trade are:
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France and Tunisia both have Mediterranean
climates that are excellent for producing/harvesting
green beans and tomatoes. In France, it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week.
a. Draw a production possibilities frontier for each
country. Hint: Remember the production
possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.
b. Identify which country has the absolute
advantage in green beans and which country has
the absolute advantage in tomatoes.
c. Identify which country has the comparative
advantage.
d. How much would France have to give up in
terms of tomatoes to gain from trade? How much
would it have to give up in terms of green beans?
In Exercise 20.31, is there an 鈥渁sk鈥� where Venezuelans may say 鈥渘o thank you鈥� to trading with Canada?
In Germany, it takes three workers to make one television and four workers to make one video camera. In Poland, it takes six workers to make one television and workers to make one video camera.
(a) Who has the absolute advantage in the production of televisions? Who has the absolute advantage in the production of video cameras? How can you tell?
(b) Calculate the opportunity cost of producing one additional television set in Germany and in Poland. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of televisions?
(c) Calculate the opportunity cost of producing one video camera in Germany and in Poland. Which country has a comparative advantage in the production of video cameras?
(d) In this example, is the absolute advantage the same as comparative advantage, or not?
(e) In what product should Germany specialize? In what product should Poland specialize?
Why might intra-industry trade seem surprising
from the point of view of comparative advantage?
Table 20.15 shows how the average costs of production for semiconductors (the 鈥渃hips鈥� in computer memories) change as the quantity of semiconductors built at that factory increases.
a. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. How does the curve illustrate economies of scale?
b. If the equilibrium quantity of semiconductors demanded is 90,000, can this economy take full advantage of economies of scale? What about if quantity demanded is 70,000 semiconductors? 50,000 semiconductors? 30,000 semiconductors?
c. Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers.
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