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Principles of Microeconomics for AP® Courses 2e

Steven A. Greenlaw, David Shapiro, Timothy Taylor

Chapter 19

International Trade

Educators


Problem 1

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.
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 absolute advantage the same as comparative advantage, or not?
e. In what product should Germany specialize? In what product should Poland specialize?

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Problem 2

How can there be any economic gains for a country from both importing and exporting the same good, like cars?

Srikar K.
Numerade Educator

Problem 3

Table 19.15 shows how the average costs of production for semiconductors (the “chips” 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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Problem 4

If the removal of trade barriers is so beneficial to international economic growth, why would a nation continue to restrict trade on some imported or exported products?

Srikar K.
Numerade Educator

Problem 5

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.
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 absolute advantage the same as comparative advantage, or not?
e. In what product should Germany specialize? In what product should Poland specialize?

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Problem 6

Is it possible to have a comparative advantage in the production of a good but not to have an absolute
advantage? Explain.

Srikar K.
Numerade Educator

Problem 7

How does comparative advantage lead to gains from trade?

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Problem 8

What is intra-industry trade?

Srikar K.
Numerade Educator

Problem 9

What are the two main sources of economic gains from intra-industry trade?

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Problem 10

What is splitting up the value chain?

Srikar K.
Numerade Educator

Problem 11

Are the gains from international trade more likely to be relatively more important to large or small
countries?

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Problem 12

Is it possible to have a comparative advantage in the production of a good but not to have an absolute
advantage? Explain.

Srikar K.
Numerade Educator

Problem 13

How does comparative advantage lead to gains from trade?

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Problem 14

You just overheard your friend say the following: “Poor countries like Malawi have no absolute
advantages. They have poor soil, low investments in formal education and hence low-skill workers, no
capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond?

Srikar K.
Numerade Educator

Problem 15

Look at Table 19.3. Is there a range of trades for which there will be no gains?

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Problem 16

You just got a job in Washington, D.C. You move into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem?

Srikar K.
Numerade Educator

Problem 17

Does intra-industry trade contradict the theory of comparative advantage?

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Problem 18

Do consumers benefit from intra-industry trade?

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Numerade Educator

Problem 19

Why might intra-industry trade seem surprising from the point of view of comparative advantage?

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Problem 20

In World Trade Organization meetings, what do you think low-income countries lobby for?

Srikar K.
Numerade Educator

Problem 21

Why might a low-income country put up barriers to trade, such as tariffs on imports?

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Problem 22

Can a nation’s comparative advantage change over time? What factors would make it change?

Srikar K.
Numerade Educator

Problem 23

You just overheard your friend say the following: “Poor countries like Malawi have no absolute
advantages. They have poor soil, low investments in formal education and hence low-skill workers, no
capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond?

Check back soon!

Problem 24

Look at Table 19.11. Is there a range of trades for which there will be no gains?

Srikar K.
Numerade Educator

Problem 25

You just got a job in Washington, D.C. You move into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem?

Check back soon!

Problem 26

In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios.
a. Who has the absolute advantage in the production of rubber or radios? How can you tell?
b. Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your
calculation may involve fractions, which is fine.) Which country has a comparative advantage in
the production of radios?
c. Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in
Malaysia. Which country has a comparative advantage in producing rubber?
d. In this example, does each country have an absolute advantage and a comparative advantage
in the same good?
e. In what product should Japan specialize? In what product should Malaysia specialize?

Srikar K.
Numerade Educator

Problem 27

Review the numbers for Canada and Venezuela from Table 19.6 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 “ask” as the relative price or trade price of lumber.
c. Is the Canadian “ask” 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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Problem 28

In Exercise 19.27, is there an “ask” where Venezuelans may say “no thank you” to trading with Canada?

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Problem 29

From earlier chapters you will recall that technological change shifts the average cost curves. Draw a graph showing how technological change could influence intra-industry trade.

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Problem 30

Consider two countries: South Korea and Taiwan. Taiwan can produce one million mobile phones per day
at the cost of $10 per phone and South Korea can produce 50 million mobile phones at $5 per phone.
Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade?

Srikar K.
Numerade Educator

Problem 31

If trade increases world GDP by 1% per year, what is the global impact of this increase over 10 years? How does this increase compare to the annual GDP of a country like Sri Lanka? Discuss. Hint: To answer this question, here are steps you may want to consider. Go to the World Development Indicators (online) published by the World Bank. Find the current level of World GDP in constant international dollars. Also, find the GDP of Sri Lanka in constant international dollars. Once you have these two numbers, compute the amount the additional increase in global incomes due to trade and compare that number to Sri Lanka’s GDP.

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Problem 32

In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios.
a. Who has the absolute advantage in the production of rubber or radios? How can you tell?
b. Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your
calculation may involve fractions, which is fine.) Which country has a comparative advantage in
the production of radios?
c. Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in
Malaysia. Which country has a comparative advantage in producing rubber?
d. In this example, does each country have an absolute advantage and a comparative advantage
in the same good?
e. In what product should Japan specialize? In what product should Malaysia specialize?

Srikar K.
Numerade Educator

Problem 33

Review the numbers for Canada and Venezuela from Table 19.14 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 “ask” as the relative price or trade price of lumber.
c. Is the Canadian “ask” you identified in (b) also beneficial for Venezuelans? Use the production
possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.

Check back soon!

Problem 34

In Exercise 19.33, is there an “ask” where Venezuelans may say “no thank you” to trading with Canada?

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