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Chapter 19: Q 10. (page 461)
What factors does Paul Krugman identify that
supported expanding international trade in the 1800s?
He argues that Improved transportation may help in this situation, as the high cost of transporting goods makes many trades unprofitable.
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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 12 workers to make one video camera.
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?
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?
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?
In this example, is absolute advantage the same as comparative advantage, or not?
In what product should Germany specialize? In what product should Poland specialize?
Are differences in geography behind the
differences in absolute advantages?
True or False: The source of comparative advantage must be natural elements like climate and mineral deposits. Explain.
In France it takes one worker to produce one sweater, and one worker to produce one bottle of wine. In Tunisia it takes two workers to produce one sweater, and three workers to produce one bottle of wine. Who has the absolute advantage in production of sweaters? Who has the absolute advantage in the production of wine? How can you tell?
Review the numbers for Canada and Venezuela from Table 19.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question.
a. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons.
b. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are
willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this 鈥渁sk鈥� as the relative price or trade price of lumber.
c. Is the Canadian 鈥渁sk鈥� you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.
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