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ECON 102 Chapter Notes - Chapter 33: Factor Endowment, Human Capital, Absolute Advantage

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whitemanatee936
26 Jan 2018
School
UBC
Department
Economics
Course
ECON 102
Professor
Wai- Ching Kong

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ECON 102 Full Course Notes
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Document Summary

Open economy: an economy that engages in international trade. Closed economy: an economy that has no foreign trade. Gains from trade: the increased output attributable to the specialization according to comparative advantage that is made possible by trade. Absolute advantage: the situation that exists when one country can produce some commodity at lower absolute cost than another country. Comparative advantage: the situation that exists when a country can produce a good with less forgone output of other goods than can another country. Learning by doing: the reduction in unit costs that often results as workers learn through repeatedly performing the same tasks. It causes a downward shift in the average cost curve. Terms of trade: the ratio of the average price of a country"s exports to the average price of its imports. Terms of trade = index of export prices x 100.

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Related Questions

The law of comparative advantage states that:

a. each country should specialize in producing the good with the lowest opportunity cost.

b. a country that is able to produce something using fewer resources than other countries would gain from specialization and trade.

c. international trade barriers slow the introduction of new goods and better technologies.

d. countries can gain from trade if production is subject to economies of scale.

e. countries must agree on how much of one good exchanges for another.

Q2. (35 points) The following table shows the output of textile and auto one unit of labor can produce in the U.K. and the U.S.:

Textiles

Autos

United Kingdom

16

4

United States

6

3

A)Which country has an absolute advantage in textiles and which country has an absolute advantage in autos?

B)What is the autarky price ratio of autos relative to textiles in each country?

C)Which country has a comparative advantage in textiles and which country has a comparative advantage in autos?

D)Which product should each country export?

E)Suppose the United States has 300 units of labor available. Construct the production-possibilities frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for the United States.

F)Suppose the international price is set at 1 auto:3 units of textile and the U.S. decides to completely specialize at producing the product in which it has a comparative advantage. How would the above graph change? Use the graph to show the gains from trade and the export and import quantities. For each unit of export good, how much does the U.S. gain (measured in terms of the other good)?

G)Discussion: At what level of international price ratio will all the benefits from trade accrue to the United States?

Your answer:

For the next three questions, refer to the production possibilities schedules shown below: Country Rubber bands Paper Clips A 40 80 B 10 40

37. In country A the opportunity cost (relative price) of one paper clip is: a. 2 rubber bands. b. 1 rubber band. c. 1/2 rubber band. d. 1/4 rubber band.

38. The schedule indicates that: a. country B can produce more rubber bands than country A. b. country A has a comparative advantage in producing rubber band. c. country B can produce more paper clips than country A. d. country A has a comparative advantage in producing rubber band and paper clips.

39. To achieve gains from specialization: a. country A should export rubber bands to country B and import country B's paper clips. b. country A should export paper clips to country B and import country B's rubber band. c. country A should produce both rubber band and paper clips and not trade with country B. d. country B should produce both rubber band and paper clips and not trade with country A.