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Questions and Answers
Which country has a comparative advantage in beer production?
Which country has a comparative advantage in beer production?
- Both countries have the same efficiency in beer production.
- Libraland produces beer more efficiently than Freedonia.
- Freedonia's opportunity cost for beer is lower than Libraland's. (correct)
- Freedonia produces beer more efficiently than Libraland. (correct)
What will be the total output of beer if both countries specialize according to their comparative advantages?
What will be the total output of beer if both countries specialize according to their comparative advantages?
- 10 million from Freedonia and 0 from Libraland.
- 70 million from Freedonia and 0 from Libraland.
- 40 million from Freedonia and 0 from Libraland. (correct)
- 40 million from Freedonia and 30 million from Libraland.
What are the gains from specialization when each country focuses on its comparative advantage?
What are the gains from specialization when each country focuses on its comparative advantage?
- Increased total outputs in both products. (correct)
- Increased overall production in wine and beer.
- No gains, as output remains the same.
- Higher availability of wine but not beer.
If Libraland specializes in wine, what will be the opportunity cost for Libraland for producing wine?
If Libraland specializes in wine, what will be the opportunity cost for Libraland for producing wine?
Considering both countries' production capabilities, which of the following describes the combined production possibilities after specialization?
Considering both countries' production capabilities, which of the following describes the combined production possibilities after specialization?
What does the slope of the production possibilities curve before trade indicate for the U.S. in terms of wheat and beans?
What does the slope of the production possibilities curve before trade indicate for the U.S. in terms of wheat and beans?
If the terms of trade are established at 2 beans for 1 wheat, what is the maximum quantity of beans available to the U.S. after trade?
If the terms of trade are established at 2 beans for 1 wheat, what is the maximum quantity of beans available to the U.S. after trade?
What opportunity cost does Freedonia face when producing pears compared to apples?
What opportunity cost does Freedonia face when producing pears compared to apples?
Which of the following sets of terms of trade is feasible for pears and apples between Freedonia and Libraland?
Which of the following sets of terms of trade is feasible for pears and apples between Freedonia and Libraland?
What is the opportunity cost of producing 1 pear in Libraland?
What is the opportunity cost of producing 1 pear in Libraland?
Which statement describes the comparative advantage theory based on the output per worker of Freedonia and Libraland?
Which statement describes the comparative advantage theory based on the output per worker of Freedonia and Libraland?
How does specializing according to comparative advantage benefit both countries involved in trade?
How does specializing according to comparative advantage benefit both countries involved in trade?
What can be concluded if the terms of trade fall outside the range of 1.5 to 2 apples per pear for both countries?
What can be concluded if the terms of trade fall outside the range of 1.5 to 2 apples per pear for both countries?
What is the main reason the United States would benefit from specializing in producing wheat at point A?
What is the main reason the United States would benefit from specializing in producing wheat at point A?
How do terms of trade influence a country's export and import behaviors?
How do terms of trade influence a country's export and import behaviors?
In which scenario would the Philippines experience a gain from trade?
In which scenario would the Philippines experience a gain from trade?
What is the opportunity cost of the Philippines producing an additional 60 million bushels of beans?
What is the opportunity cost of the Philippines producing an additional 60 million bushels of beans?
What does the production possibilities frontier illustrate in the context of trade?
What does the production possibilities frontier illustrate in the context of trade?
After specializing, why might the United States choose to import beans from the Philippines?
After specializing, why might the United States choose to import beans from the Philippines?
What illustrates the concept of comparative advantage in production?
What illustrates the concept of comparative advantage in production?
What is a potential disadvantage of the United States specializing in wheat production?
What is a potential disadvantage of the United States specializing in wheat production?
Why is the opportunity cost considered a critical concept in production possibilities analysis?
Why is the opportunity cost considered a critical concept in production possibilities analysis?
What is the effect of an increase in trade between the United States and the Philippines on their production capabilities?
What is the effect of an increase in trade between the United States and the Philippines on their production capabilities?
Which country is better at producing wheat based on opportunity cost?
Which country is better at producing wheat based on opportunity cost?
Considering the opportunity costs, which statement about the Philippines is true?
Considering the opportunity costs, which statement about the Philippines is true?
What is the concept of gains from specialization in relation to the United States and the Philippines?
What is the concept of gains from specialization in relation to the United States and the Philippines?
What best describes the opportunity cost of producing one unit of wheat in the United States?
What best describes the opportunity cost of producing one unit of wheat in the United States?
In the context of comparative advantage, which statement is true regarding trade between the U.S. and the Philippines?
In the context of comparative advantage, which statement is true regarding trade between the U.S. and the Philippines?
How does opportunity cost influence production choices in the U.S. and Philippines?
How does opportunity cost influence production choices in the U.S. and Philippines?
If the United States produces 4 units of wheat, how many beans must it give up based on its opportunity cost?
If the United States produces 4 units of wheat, how many beans must it give up based on its opportunity cost?
What is the implication of comparative advantage for international trade?
What is the implication of comparative advantage for international trade?
What does the Production Possibilities Frontier illustrate about the U.S. and the Philippines?
What does the Production Possibilities Frontier illustrate about the U.S. and the Philippines?
In terms of specialization, how should the Philippines approach its production strategy?
In terms of specialization, how should the Philippines approach its production strategy?
What is the primary reason nations engage in international trade according to the theory of absolute advantage?
What is the primary reason nations engage in international trade according to the theory of absolute advantage?
How do gains from specialization manifest in international trade?
How do gains from specialization manifest in international trade?
What does opportunity cost represent in the context of production choices?
What does opportunity cost represent in the context of production choices?
Which of the following best describes the role of production possibilities frontiers (PPF) in trade models?
Which of the following best describes the role of production possibilities frontiers (PPF) in trade models?
What impact does a difference in factor endowments have on trade patterns among nations?
What impact does a difference in factor endowments have on trade patterns among nations?
In which scenario would a nation benefit from engaging in international trade?
In which scenario would a nation benefit from engaging in international trade?
Why do some groups within a nation lose out as a result of freer trade?
Why do some groups within a nation lose out as a result of freer trade?
Which factor is least likely to influence a nation’s decision to import certain goods?
Which factor is least likely to influence a nation’s decision to import certain goods?
In the context of international trade, what is the significance of a country's comparative advantage?
In the context of international trade, what is the significance of a country's comparative advantage?
Study Notes
Production and Trading Possibilities Curves
- United States - before trade the slope is 1 (1 wheat for 1 bean)
- United States - after trade with a terms of trade of 2 beans for 1 wheat, the maximum quantity of beans available increases
- Philippines - before trade, the slope is 1/3 (1 wheat for 3 beans)
- Philippines - after trade with a terms of trade of 2 beans for 1 wheat, the maximum quantity of wheat available increases
Output/Worker
- Before trade, 1 bushel of pears cost 2 bushels of apples in Freedonia
- Before trade, 1 bushel of Pears cost 1.5 bushels of apples in Libraland
- Terms of the trade must be 1 bushel of pears = 1.5 to 2 apples
Production Without Trade
- The United States produces at point "C" and the Philippines produces at point "B"
- United States - 320 million bushels of Wheat and 160 million bushels of Beans
- Philippines - 80 million bushels of Wheat and 120 million bushels of Beans
Production With Trade
- The United States specializes at "A" and the Philippines specializes at "F"
- The United States - 400 million bushels of Wheat
- The Philippines - 300 million bushels of Beans
Terms of Trade
- The average price of a country’s exports compared with the price of its imports
- Terms of trade = Average price of exports × 100 / Average price of imports
No Trade Scenario
- Pre-trade
- Philippines: 60 million bushels of beans produced and consumed, 80 million bushels of wheat produced and consumed
- United States: 160 million bushels of beans produced and consumed, 240 million bushels of wheat produced and consumed
- Post-trade
- Philippines: 300 million bushels of beans produced, 0 exported, 60 consumed, 0 wheat produced, 120 imported, 120 consumed
- United States: 0 beans produced, 240 exported, 240 consumed, 400 wheat produced, -120 imported, 280 consumed
###Â Absolute Advantage
- Nations should specialize in goods and services for which they have an absolute advantage
- They should trade for goods and services for which they do not enjoy an advantage
###Â Comparative Advantage
- The advantage that comes from producing something at a lower opportunity cost than others
- The U.S. is comparatively better at making wheat because it gives up 1 bean per bushel of wheat
- The Philippines is comparatively better at making beans because it gives up only 1/3 of wheat per bushel of beans
###Â Trends in World Trade and GDP (1971-2021)
- Both world trade and GDP have increased substantially
###Â International Trade ( 2001-2021)
- Both developed and developing nations have seen increased trade, but developing nations have seen larger increases
###Â Merchandise Trade
- The United States has the most trade with Canada & Mexico
- China has the most trade with the rest of Asia
- The EUÂ has the most trade with the rest of Europe
Leading Trading Nations (2021)
- The top 10 trading nations are:
- China
- United States
- Germany
- Japan
- The Netherlands
- Hong Kong
- South Korea
- France
- United Kingdom
- Italy
Specialization
- Nations may have a production advantage from better skills, equipment, or resources
Factor Endowment
- Differences in trade patterns are the result of:
- differences in climate
- differences in natural resources
- differences in human capital
- government policies
Absolute Advantage Example
- Canada and Mexico are compared
- Canada is more productive in making wheat
- Mexico is more productive in making beans
Test Your Understanding (Freedonia and Libraland)
- Freedonia - 4 beers/worker, 1 wine/worker
- Libraland - 3 beers/worker, 4 wines/worker
- Freedonia should specialize in beer
- Libraland should specialize in wine
- Initial output:
- Freedonia - 40 million beer, 10 million wine
- Libraland - 30 million beer, 40 million wine
- Post-specialization output:
- Freedonia - 80 million beer
- Libraland - 80 million wine
- Gains from trade - 10 million more beer and 30 million more wine
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Description
Explore the concepts of production possibilities and trade dynamics between the United States and the Philippines in this quiz. Analyze the impact of trade on the production of wheat and beans, as well as the cost of goods in different regions. Test your understanding of economic principles behind trade agreements and production efficiency.
