2: Gains from Trade

Question 1

By what is the comparative advantage of a country determined?

Answer 1

The comparative advantage of a country is determined by its opportunity costs.

Question 2

What is a autarky?

Answer 2

to live isolated by producing only for themselves
==> each country consumes exactly the amount of goods that it has produced by itself.

Question 3

What is the definition of opportunity costs?

Answer 3

The opportunity costs of one good are equal to the amount of the other good that could have been produced with the same labor input.

Question 4

What is the definition of the comparative advantage?

Answer 4

A country has a comparative advantage in the production of one good if it has lower opportunity costs in the production of this good than other countries.

Question 5

How can we determine the comparative advantage?

Answer 5

If we determine the opportunity costs of one good for all countries, we know which country has a comparative advantage in the production of this good.

Question 6

What is the absolute advantage?

Answer 6

A country has an absolute advantage in the production of a good if this good can be produced at lower absolute costs (that is, a lower labor input) or the country can produce a larger total amount of this good.

Question 7

When a country can produce 10mio. bananas and 100’000 cars, how big is the comparative advantage of producing cars in comparison to planting bananas.

Answer 7

For each individual banana, the opportunity costs are 0.01 cars
(100’000/10’000’000)

Opportunity costs of one single car is equal to 100 bananas
(10’000’000/100’000)

Question 8

What is the Production Possibility Frontier?

Answer 8

The production possibility frontier (sometimes also “transformation curve” shows the maximum quantity of goods that can be produced.

Question 9

What is a “Pareto-Improvement”?

Answer 9

In a “Pareto-Improvement” at least on individual benefits while no individual is worse-off.

In principle, the “winners” could compensate the “losers” for their losses such that no individual would be worse of after-trading takes place.
==> However, in reality there are usually no compensations by the “winners” for the “losers”.

Question 10

Countries can benefit from specialization. However, that doesn’t mean there are no “losers” in these countries.

Why?

Answer 10

For instance the producers of the goods with the comparative disadvantage that is now imported from abroad lose their revenue.

Moreover, they might also have to fire some of their workers.

Extreme specialization can make a country dependent on foreign countries.