International Trade and Production Curves

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Questions and Answers

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?

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?

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?

1 unit of beer per unit of wine produced. Signup and view all the answers

Considering both countries' production capabilities, which of the following describes the combined production possibilities after specialization?

The total production capabilities increase significantly. Signup and view all the answers

What does the slope of the production possibilities curve before trade indicate for the U.S. in terms of wheat and beans?

The U.S. sacrifices 1 wheat to produce 1 bean. Signup and view all the answers

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?

It increases due to specialization. Signup and view all the answers

What opportunity cost does Freedonia face when producing pears compared to apples?

2 apples for each pear produced. Signup and view all the answers

Which of the following sets of terms of trade is feasible for pears and apples between Freedonia and Libraland?

1 pear = 1.75 bushels of apples. Signup and view all the answers

What is the opportunity cost of producing 1 pear in Libraland?

1.5 apples. Signup and view all the answers

Which statement describes the comparative advantage theory based on the output per worker of Freedonia and Libraland?

Freedonia has a comparative advantage in apples. Signup and view all the answers

How does specializing according to comparative advantage benefit both countries involved in trade?

It increases total production efficiency. Signup and view all the answers

What can be concluded if the terms of trade fall outside the range of 1.5 to 2 apples per pear for both countries?

It is unfavorable for at least one country. Signup and view all the answers

What is the main reason the United States would benefit from specializing in producing wheat at point A?

Higher output of wheat compared to the Philippines at specialization. Signup and view all the answers

How do terms of trade influence a country's export and import behaviors?

Favorable terms of trade encourage countries to specialize in exports. Signup and view all the answers

In which scenario would the Philippines experience a gain from trade?

When specialization leads to increased production of both beans and wheat. Signup and view all the answers

What is the opportunity cost of the Philippines producing an additional 60 million bushels of beans?

It forgoes the production of 120 million bushels of wheat. Signup and view all the answers

What does the production possibilities frontier illustrate in the context of trade?

The trade-off between two goods a country can produce. Signup and view all the answers

After specializing, why might the United States choose to import beans from the Philippines?

It cannot produce beans without sacrificing too much wheat. Signup and view all the answers

What illustrates the concept of comparative advantage in production?

A country having a lower opportunity cost in producing a specific good. Signup and view all the answers

What is a potential disadvantage of the United States specializing in wheat production?

Dependence on a single crop can lead to economic vulnerability. Signup and view all the answers

Why is the opportunity cost considered a critical concept in production possibilities analysis?

It provides insight into resource allocation and efficiency. Signup and view all the answers

What is the effect of an increase in trade between the United States and the Philippines on their production capabilities?

It typically leads to a rise in overall production for both countries. Signup and view all the answers

Which country is better at producing wheat based on opportunity cost?

The United States gives up fewer beans to produce wheat. Signup and view all the answers

Considering the opportunity costs, which statement about the Philippines is true?

The Philippines gives up less wheat per bean produced. Signup and view all the answers

What is the concept of gains from specialization in relation to the United States and the Philippines?

Each country should specialize based on their comparative advantages. Signup and view all the answers

What best describes the opportunity cost of producing one unit of wheat in the United States?

1 bean. Signup and view all the answers

In the context of comparative advantage, which statement is true regarding trade between the U.S. and the Philippines?

Each country gains by specializing and trading according to their strengths. Signup and view all the answers

How does opportunity cost influence production choices in the U.S. and Philippines?

It shows how many beans each country sacrifices for wheat. Signup and view all the answers

If the United States produces 4 units of wheat, how many beans must it give up based on its opportunity cost?

1 unit of beans. Signup and view all the answers

What is the implication of comparative advantage for international trade?

Countries should produce and export goods they make at the lowest opportunity cost. Signup and view all the answers

What does the Production Possibilities Frontier illustrate about the U.S. and the Philippines?

The maximum output possible by each country. Signup and view all the answers

In terms of specialization, how should the Philippines approach its production strategy?

Specialize in beans, leveraging lower opportunity cost. Signup and view all the answers

What is the primary reason nations engage in international trade according to the theory of absolute advantage?

To specialize in goods and services for which they have higher productivity. Signup and view all the answers

How do gains from specialization manifest in international trade?

By increasing the overall efficiency and reducing opportunity costs. Signup and view all the answers

What does opportunity cost represent in the context of production choices?

The value of the next best alternative foregone when making a choice. Signup and view all the answers

Which of the following best describes the role of production possibilities frontiers (PPF) in trade models?

They represent the maximum output achievable with given resources. Signup and view all the answers

What impact does a difference in factor endowments have on trade patterns among nations?

Different resources lead to variations in comparative advantages. Signup and view all the answers

In which scenario would a nation benefit from engaging in international trade?

When it specializes in goods where it holds a comparative advantage. Signup and view all the answers

Why do some groups within a nation lose out as a result of freer trade?

Due to increased competition from foreign producers. Signup and view all the answers

Which factor is least likely to influence a nation’s decision to import certain goods?

International political relations with trading partners. Signup and view all the answers

In the context of international trade, what is the significance of a country's comparative advantage?

It reflects the ability to produce goods at a lower opportunity cost compared to others. Signup and view all the answers

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

### 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

### 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

### Trends in World Trade and GDP (1971-2021)

Both world trade and GDP have increased substantially

### International Trade ( 2001-2021)

Both developed and developing nations have seen increased trade, but developing nations have seen larger increases

### Merchandise Trade

The United States has the most trade with Canada & Mexico
China has the most trade with the rest of Asia
The EU 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

Studying That Suits You

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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.