Study Questions Week 2
1. According to the Mercantilists, a country’s national well-being was related to
____________.
2. Describe Hume’s “species flow doctrine” and explain how this highlighted the short run
nature of the Mercantilists argument.
3. What is meant by the term “absolute advantage”? If we find that in the US, one hour of
labor in wheat production produces 100 kilos of potatoes while in Mali (a poor country)
one hour of labor produces only 10 kilos of wheat, do we say that the US has an
absolute advantage (compared to Mali) in wheat production? Do we need to consider
relative wages between the US and Mali to discuss absolute advantage?
4. For Adam Smith, national well-being was related to (chose one: employment, wages,
consumption, exports).
5. What type of trade policies would be favored by Mercantilists? Adam Smith?
Wheat
Cloth
Country A Rest of World (ROW)
50
20
25
20
6. Refer to the table directly above. This table shows the labor productivity (output per
hour) for wheat and cloth in Country A as well as for the Rest of the World (ROW). For
example, one hour of labor can produce 50 units of wheat in Country A, or that same
hour of labor could produce 25 units of cloth in Country A.
a. In what product(s) does Country A have an absolute advantage, if any?
b. What is the opportunity cost of one unit of cloth in Country A? What is the opportunity
cost of one unit of cloth in the “Rest of the World”? Where is a unit of cloth relatively
cheaper? Who has a comparative advantage in the production of cloth?
7. Refer to the graph above. The PPC shows the (pre trade) production possibilities curve
for each country. The points labeled as So shows the pretrade consumption bundle for
each country. C represents the post trade consumption bundle for each country. So and
C are given to you. They depend on demands in each country and cannot be determined
within this model). The trade line assumes a trade price of 1W = 1C.
a. Why do the red “Trade Lines” have the same slope?
b. Who has a comparative advantage at wheat?
c. In graph above who produces cloth? How much cloth do they produce? How
much do they consume at home and how much do they export?
d. In the graph above who produces wheat? How much wheat do they produce
and how much do they consume domestically and how much do they export?
e. Compared to the no trade case, who benefits from trade in this model? Who is
worse off?
8. Refer to the example above, described in chapter 2. The MRT for the US is .5. What is
the MRT? Why is it equal to .5 in the US, and what does the .5 measure? (is it dollars or
units?) What is the MRT for Canada? Use the MRTs to explain why the US has a
comparative advantage in autos in this example. Explain the range of the possible terms
of trade are for this example. In this example, as the US specializes, how many units of
autos does it produce, consume at home, and export? In this example how many autos
does Canada produce, consume at home, and import?
9. The table below shows three points on the PP curves for Jill and Sarah. Jill and Sarah live
on different sides of a desert island. Inititally, they don’t trade and must operate on
their own personal PP curves and chose the “No Trade Consumption” point on their PP
curves. Plot the PP curves for Sarah and Jill on the graphs below. Show their respective
initial, no trade consumption levels and label these as points As and Aj. Who has an
absolute advantage in good X, good Y? What are the opportunity costs of 1 more unit of
good X ( the MRTs of good x into good X) for Jill and Sarah? Who has a comparative
advantage in good X? in good Y? What are the limits on the possible terms of trade
(“price of good X”). Suppose Jill and Sarah agreed to trade 1 unit of good X for 1 unit of
good Y. They specialized according to their respective comparative advantages and
traded. Show the trading line on your graph. In the end, Sarah sold 15 units of good X to
Jill. Show the final levels of consumption for Sarah and Jill on your graph. Discuss the
consumption gains made possible by trade for each.
Sarah
Sarah’s PP Curve
No Trade
Consumption
Good X 0
80
Good Y 50
10
100
0
Good X
Good Y
Jill
Jill’s PP Curve
No Trade
Consumption
0
5
10
30
15
0
10. A famous research scientist (MS. X) was tremendously productive in the laboratory. She
was also a fast typist (200 words per minute). A trained secretary, MS. Y, could not do
any laboratory work, but could type pretty well (100 words per minute). Compared to
the MS. X we can say that MS. Y has a comparative advantage in ___________ and it
makes sense for MS. X to “outsource” her typing to MS. X even though MS Y is a slower
typist than MS. X.
11. According to the information in the article about orange production do you think the US
has an absolute advantage in orange production (compared to Brazil)? Do you think the
US has a comparative advantage in orange production (compared to Brazil)? What type
of data would you need to support your argument? (hint: try making a table like the one
below filling in the cells with hypothetical data).
12. According to the information in the article about orange production what would be the
effect(s) of technological change in the mechanical picking of oranges (like the one
described in the article) on the US absolute and comparative advantages in orange
production (assuming no such change in Brazil). (Hint: how would this change the
productivity numbers in your table above and the resulting conclusion about the US
comparative advantage?)
13. As a result of a trend toward freer international trade in agricultural goods (lower
import tariffs and quotas), the US will increase its exports of some agricultural
commodities (like rice, wheat, and soybeans), and the US will increase its imports of
other agricultural commodities (like apple juice, orange juice, and garlic). Since we
usually argue that freer international trade results in increased specialization according
to comparative advantage, what seems to characterize the agricultural goods for which
the US has a comparative advantage? What seems to characterize the agricultural goods
for which the US does not have a comparative advantage?
14. In the examples above, the terms of trade are only determined within a range. Where
the actual equilibrium terms of trade settle will depend on other conditions. According
to the theory of reciprocal demand, what determines the equilibrium terms of trade?
Explain the text’s term “the importance of being unimportant” in determining the
relative gains from trade for two trading partners.
15. According to the data presented in table 2.5, what happened to Japan’s terms of trade
between 2000 and 2006?
16. List some of the dynamic gains from trade not captured by simple comparative
advantage theory.
17. The examples above assumed constant costs when constructing a country’s PP curve.
How does the existence of increasing costs change the outcome of the comparative
advantage story?
18. The author states that the data presented in figure 2.9 show trading patterns consistent
with the theory of trade based on comparative advantage. In what ways do these data
support the theory of comparative advantage?
19. Summarize the author’s arguments concerning outsourcing.