Chapter 3 Exercises PDF

Chapter 3 Exercises Shuo Xu September 19, 2024 Chapter 3: Gains from Trade I Absolute Advantage I Comparative Advantage I Trade and Specialization Exercise 1: Absolute Advantage Problem: Given two countries, calculate which one has the absolute advantage in producin...

Chapter 3 Exercises Shuo Xu September 19, 2024 Chapter 3: Gains from Trade I Absolute Advantage I Comparative Advantage I Trade and Specialization Exercise 1: Absolute Advantage Problem: Given two countries, calculate which one has the absolute advantage in producing two goods. Solution: I Absolute advantage refers to the ability of a party (country) to produce more of a good or service than competitors using the same amount of resources. I Formula: compare the production capacity of each country for each good. Exercise 2: Comparative Advantage Problem: Calculate which country has a comparative advantage in producing a good, based on opportunity cost. Solution: I Comparative advantage refers to a party’s ability to produce a good at a lower opportunity cost than another party. I Formula: opportunity cost of a good is the amount of the other good that must be given up to produce one more unit of the good in question. Exercise 3: Gains from Trade Problem: Two countries specialize according to comparative advantage. Calculate the gains from trade. Solution: I Trade allows countries to consume beyond their production possibilities frontier (PPF). I Use numerical examples to show gains. Exercise 4: Production Possibilities Frontier Problem: Draw and interpret the PPF of a country producing two goods. Solution: I The slope of the PPF reflects the opportunity cost of one good in terms of the other. I A straight-line PPF suggests constant opportunity costs, while a bowed-out PPF suggests increasing opportunity costs. Exercise 5: Specialization and Trade Problem: How does specialization based on comparative advantage benefit trade partners? Solution: I Specialization allows for more efficient production. I Trade partners can both benefit from exchange if they specialize where they have a comparative advantage. Conclusion I We explored absolute and comparative advantage. I Understood how trade improves welfare through specialization. I Any questions?