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Chapter 3 & part of Chapter 4

The document discusses concepts related to comparative advantage and trade, defining key terms such as mercantilism, absolute and comparative productivity advantages, and opportunity costs. It explains how to determine trade prices based on opportunity costs and identifies which countries have absolute and comparative advantages in producing specific goods. Additionally, it introduces the Heckscher-Ohlin model, highlighting factors that influence trade patterns based on resource abundance and provides examples of capital and labor-abundant countries and their respective goods.

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5 views4 pages

Chapter 3 & part of Chapter 4

The document discusses concepts related to comparative advantage and trade, defining key terms such as mercantilism, absolute and comparative productivity advantages, and opportunity costs. It explains how to determine trade prices based on opportunity costs and identifies which countries have absolute and comparative advantages in producing specific goods. Additionally, it introduces the Heckscher-Ohlin model, highlighting factors that influence trade patterns based on resource abundance and provides examples of capital and labor-abundant countries and their respective goods.

Uploaded by

lequangvuongx2000
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 3: Comparative Advantage and the Gains from Trade

Chapter 4: Comparative Advantage and Factor Endowments


Class Notes: these count for 1% of your total grade

1. Define the following:


Mercantilism (n) is an economic theory developed in the 16th to 18th centuries that says that a
government should control the economy and that a nation should increase its wealth by selling
more than it buys from other nations.
Absolute productivity advantage means having a higher output per hour worked than a
competitor’s.
Production possibilities curve is a model used to show the tradeoffs associated with allocating
resources between the production of two goods.
Autarky (n) is countries that are economically independent.
Comparative productivity advantage means that a country has a lower opportunity cost than a
competitor’s.

2. An opportunity cost ratio reveals what for a nation?


An opportunity cost ratio indicates the amount of one good or service a nation must sacrifice to
produce an additional unit of a different good or service.

3. How do we determine a trade price for two countries when they have an absolute or
comparative advantage?
To determine a trade price for two countries for two countries when they have an absolute or
comparative advantage, it is essential to evaluate the opportunity costs of both nations. For
example, consider the following opportunity costs for two countries:
 Country A:
o 1 burger = 40/20 = 2 hot dogs
o 1 hot dog = 20/40 = 0.5 burgers
 Country B:
o 1 burger = 25/50 = 0.5 hot dogs
o 1 hot dog = 50/25 = 2 burgers
By analyzing these opportunity costs, we can determine a trade price that benefits both countries.

4. For the two countries above, how can you determine who has the absolute advantage in
each good?
o Country 1 produces 50 tacos if it makes only tacos and 30 for pizzas.
o Country 2 produces 30 tacos if it makes only tacos and 60 for pizzas.
 Country 1 has the absolute advantage in producing tacos. Country 2 has the absolute
advantage in producing pizzas.

5. For the two countries above, how can you determine (and who has each) the comparative
advantage for each good?
 Country 1 has lower opportunity cost for producing tacos (0.6 pizzas < 2 pizzas). So,
country 1 has a comparative advantage in taco production.
 Country 2 has lower opportunity cost for producing pizzas (0.5 tacos < 1.6 tacos). So,
country 2 has a comparative advantage in pizza production.

6. If each country devotes half their labor to each good, how much will each country
produce of each good?
b. 25
b’. 15
c. 15
c’. 30

7. What is the opportunity cost for country 1 when it comes to making tacos?
1 taco = 0.6 pizza

8. What is the opportunity cost for country 2 when it comes to making tacos?
1 taco = 2 pizzas

9. If each country were to specialize in their comparative advantage they would produce
Country 1: 50 tacos
Country 2: 60 pizzas

10. What is a reasonable term of trade for each country (hint: it lies in-between their
opportunity cost ratios)?
A reasonable term of trade should be:
1 pizza for 1 taco
1 taco for 1.25 pizza

11. The Heckscher-Ohlin model of trade relies on what two aspects to determine which
country exports which good?
Factor 1: The amount of resource (like capital or labor) a country has.
Factor 2: Whether a good requires more capital or more labor to produce.
12. Mathematically, what does your answer from 11 look like (i.e. no numbers are needed
just ratios)?
Let CA and LA be the capital and labor capacity of Country A, CB and LB be the capital and
labor capacity of Country B, we have the 2 ratios:
CA/LA and CB/LB
- Factor Abundance:
o A country is capital-abundant if its capital-to-labor ratio C/L is higher than that of
another country.
o A country is labor-abundant if its labor-to-capital ratio L/C is higher than that of
another country.
- Trade Prediction:
o A country exports the good that take advantage of its abundant factor.
o A country imports the good that take has its scarce factor.
- Thus, if Country A has a higher C/L than Country B, then:
o Country A will export capital-intensive goods.
o Country B will export labor-intensive goods.

13. Provide an example that shows 1 country being capital abundant and the other country
being labor abundant. Also, provide an example that show one good being capital intensive
and the other being labor intensive. Finally, which country exports which good?
o Capital-Abundant vs. Labor-Abundant Country:
 Country A (Capital-Abundant): The United States has a high level of capital
resources, such as advanced machinery and technology.
 Country B (Labor-Abundant): India has a large labor force and relatively lower
capital availability.
o Capital-Intensive vs. Labor-Intensive Goods:
 Capital-Intensive Good: Automobiles, which require expensive machinery and
advanced technology to produce.
 Labor-Intensive Good: Textiles, which require a large workforce for production.
o Trade Prediction Based on the Heckscher-Ohlin Model:
 The capital-abundant country (United States) will specialize in and export capital-
intensive goods (automobiles).
 The labor-abundant country (India) will specialize in and export labor-intensive
goods (textiles).

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