BR2: Bridge: Trade and Comparative Advantage
Question 1
Sally can type 100 words per minute while David can type 200 words per minute. Given these numbers, society would be better off if which one of the two was employed as a typist?
A. Sally
B. David
C. It depends.
Hint
Find their comparative advantages to determine who should specialize in typing.Answer
C. It depends. It depends on their opportunity cost of typing. The question does not give you any information on what Sally and David give up in order to type. David does have an absolute advantage in typing because he can type more words in a minute. However, Sally may give up less to type for a minute than David does. Without knowing their opportunity costs, the answer is “it depends.”Question 2
If Japan can produce 3 rice cakes or 6 seaweed salads in an hour, while Indonesia can produce 2 rice cakes or 5 seaweed salads in an hour, which of the following is true?
A. Japan has a comparative advantage in producing both goods.
B. Japan has a comparative advantage in producing seaweed salads.
C. Indonesia has a comparative advantage in producing rice cakes.
D. Indonesia has a comparative advantage in producing seaweed salads.
Hint
Comparative advantages are determined by comparing opportunity costs.Answer
D. Indonesia has a comparative advantage in producing seaweed salads. Indonesia has to give up 0.4 rice cakes for every seaweed salad it produces while Japan has to give up 0.5 rice cakes for every seaweed salad it produces. Indonesia’s opportunity cost of producing a seaweed salad is lower than Japan’s. Therefore, Indonesia has a comparative advantage in producing seaweed salads.Japan has a comparative advantage is producing rice cakes as it gives up 2 seaweed salad for every rice cake produced while Indonesia has to give up 2.5 rice cakes for every seaweed salad.
Question 3
Having a comparative advantage in producing a good means that:
A. a country can produce the good at a lower monetary cost than other countries.
B. a country can produce the good at a lower opportunity cost than other countries.
C. a country can produce more units of that good than any other country.
D. a country can produce the good at both a lower monetary and a lower opportunity cost than other countries.
Hint
Comparative advantage refers to the relative efficiency of different individuals or countries in producing given products.Answer
B. a country can produce the good at a lower opportunity cost than other countries. Comparative advantage is the ability of an individual or country to produce a good or service more efficiently, i.e., at a lower opportunity cost, than other producers. Comparative advantage thus provides the basis for trade, since if each country produces the goods in which it has a comparative advantage, more total output will be available to be distributed, via trade, to many other countries.Question 4
A country that does not have an absolute advantage in the production of any good or service:
A. can specialize but will not gain from trade.
B. can benefit from trade if another country gives up all of its gains.
C. can benefit from trade by specializing in goods in which it has a comparative advantage.
D. cannot benefit from trade under any circumstances.
Hint
Absolute advantage means a country can produce a good or service at a lower input cost than another country. Comparative advantage means a country can produce a good service at a lower opportunity cost—a lower cost in terms of foregone output of other goods and services—than another country.Answer
C. can benefit from trade by specializing in goods in which it has a comparative advantage. Comparative advantage is the advantage enjoyed by a country that can produce a good or service more efficiently, i.e., at a lower opportunity cost, than other countries. Comparative advantage provides the basis for trade, since if each country specializes in the products in which it has a comparative advantage, total output would be higher, and the increased output can be distributed to different countries via trade.Because comparative advantage is based on opportunity cost—foregone output of other goods and services—rather than production costs—which determine absolute advantage—a country can benefit from specialization and trade even if it does not have an absolute advantage in the production of any good.
Question 5
If Switzerland can produce more watches in a year than Austria, we know that Switzerland:
A. definitely has both a comparative advantage and an absolute advantage in producing watches.
B. has neither a comparative advantage nor an absolute advantage in producing watches.
C. definitely has a comparative advantage in producing watches.
D. definitely has an absolute advantage in producing watches.