10 Questions
What is the driving force of specialization according to the text?
Comparative advantage
In which sector does Ruby have an absolute advantage relative to Frank?
Both meat and potatoes
What should be the price of trade for both parties to gain from it?
Above their opportunity costs
What is the key factor that allows trade to benefit everyone in society?
Specialization
If American workers can produce 4 cars per year, how many cars can Japanese workers produce?
4 cars per year
What is the opportunity cost of producing one ton of grain for the American worker?
2 cars
In the absence of trade, what is the total amount of grain produced by Japanese workers?
150 million tons
Which country has a comparative advantage in producing cars?
Germany
If X = 3, what would be the impact on trade between Germany and France?
Germany will export wine
According to the provided text, which group of workers lost jobs primarily due to import competition?
Less skilled workers
Study Notes
International Trade
Production Capacity and PPF Graph
- An American worker can produce 10 tons of grain per year, while a Japanese worker can produce 5 tons of grain per year.
- Each country has 100 million workers.
Opportunity Costs and Comparative Advantage
- The opportunity cost of producing one unit of grain is the number of cars that could have been produced instead.
- A country has an absolute advantage if it can produce a good using fewer inputs than another country.
- A country has a comparative advantage if it can produce a good at a lower opportunity cost than another country.
Trade Example
- Without trade, half of each country's workers produce cars and half produce grain.
- With trade, each country specializes in the good for which it has a comparative advantage.
- Trade makes each country better off if the price of the trade lies between the opportunity costs.
German and French Workers
- A German worker takes 400 hours to produce a car and 2 hours to produce a case of wine.
- A French worker takes 600 hours to produce a car and X hours to produce a case of wine.
- Gains from trade are possible if X < 400.
- Germany will export cars and import wine if X > 2.
Cost of Trade Tariffs
- Unemployment can result from business moving to China and import competition decreasing domestic businesses' prices.
- Workers in the manufacturing industry and less skilled workers are most affected.
Interdependence and Specialization
- Frank and Ruby have 8 hours of resources and can produce meat and potatoes.
- Specialization and trade are beneficial if the trade terms are favorable.
- The price of trade must lie between the opportunity costs for both parties to gain from trade.
Comparative Advantage
- Comparative advantage is the driving force of specialization.
- A country should specialize in the sector in which it has a comparative advantage.
- Trade can benefit everyone in society if the price of trade is favorable.
Test your understanding of gains from trade and specialization with this quiz based on a scenario involving Frank and Ruby's land productivity and possible product choices. Should they produce both products or specialize and trade? Explore different trade options in this interactive quiz.
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