CHAPTER 3: Interdependence and the Gains from Trade

Question 1

Why do people choose to become interdependent?

Answer 1

understanding the modern global economy. Most countries today import from abroad many of the goods and services they consume, and they export to foreign customers many of the goods and services they produce.

Question 2

the ability to produce a good using fewer inputs than another producer

Answer 2

absolute advantage

Question 3

whatever must be given up to obtain some item

Answer 3

opportunity cost

Question 4

the ability to produce a good at a lower opportunity cost than another producer

Answer 4

comparative advantage

Question 5

What determines the price at which trade takes place? How are the gains from trade shared between the trading parties?

Answer 5

For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs.

Question 6

goods produced abroad and sold domestically

Answer 6

imports

Question 7

goods produced domestically and sold abroad

Answer 7

exports

Question 8

Suppose that a skilled brain surgeon also happens to be the world’s fastest typist. Should she do her own typing or hire a secretary? Explain.

Answer 8

Even though the surgeon is the fastest typist, it’s economically more efficient for her to hire a secretary and focus her time on brain surgery, where her skills generate much more value.