Module 2

Question 1

Absolute Advantage

Answer 1

When one country can use fewer resources to produce a good compared to another country; when a country is more productive compared to another country.

Question 2

Gain from trade

Answer 2

a country that can consume more than it can produce as a result of specialization and trade

Question 3

intra-industry trade

Answer 3

international trade of goods within the same industry

Question 4

splitting up the value chain

Answer 4

many of the different stages of producing a good happen in different geographic locations

Question 5

tariffs

Answer 5

taxes that governments place on imported goods.

Question 6

Value chain

Answer 6

how a good is produced in stages

Question 7

Brazil can produce 100 pounds of beef or 10 autos; in contrast the United States can
produce 40 pounds of beef or 30 autos. Which country has the absolute advantage in
beef? Which country has the absolute advantage in producing autos? What is the
opportunity cost of producing one pound of beef in Brazil? What is the opportunity
cost of producing one pound of beef in the United States?

Answer 7

Brazil has the absolute advantage in producing beef and the United States has the
absolute advantage in autos. The opportunity cost of producing one pound of beef is
1/10 of an auto; in the United States it is 3/4 of an auto

Question 8

What is absolute advantage? What is comparative advantage?

Answer 8

Absolute advantage is when one country is able to produce more of a good than
another. Comparative advantage is when a country has a lower opportunity cost to
produce the good than another

Question 9

Under what conditions does comparative advantage lead to gains from trade?

Answer 9

Comparative advantage leads to gains from trade when countries specialize and
produce mainly what they do best.

Question 10

What factors does Paul Krugman identify that supported the expansion of
international trade in the 1800s

Answer 10

The improvements in transportation that came with steamships and railroads and
created international markets

Question 11

Is it possible to have a comparative advantage in the production of a good but not to
have an absolute advantage? Explain

Answer 11

Yes. Comparative advantage is defined by what you have to give up to produce a
good. If the opportunity cost of production is low, a country will still have a comparative
advantage even when at an absolute disadvantage

Question 12

How does comparative advantage lead to gains from trade?

Answer 12

By each country specializing in what it does best, the total amount of production
increases and all parties can gain from trade.

Question 13

What is intra-industry trade?

Answer 13

Trade that takes place within a specific industry

Question 14

What are the two main sources of economic gains from intra-industry trade?

Answer 14

The division of labor leads to improvements in skill, and economies of scale

Question 15

What is splitting up the value chain?

Answer 15

Splitting up the value chain involves different countries undertaking different stages of
production for a good.

Question 16

Are the gains from international trade more likely to be relatively more important to
large or small countries?

Answer 16

They are more likely to be relatively more important to small countries, where
absolute advantage is smaller and it would be difficult to produce everything the
population wants or needs domestically

Question 17

Are differences in geography behind the differences in absolute advantages?

Answer 17

To a certain extent, yes. Greater natural resources or access to the sea can lead to
absolute advantage for certain goods.

Question 18

Why does the United States not have an absolute advantage in coffee?

Answer 18

The climate in the United States is not ideal for growing coffee, so countries closer to
the equator tend to have a greater absolute advantage.

Question 19

Why might a low-income country put up barriers to trade, such as tariffs on imports?

Answer 19

Even though low-income countries benefit more from trade than high-income
countries, a low-income country may put up barriers to trade, such as tariffs on imports, in
order to protect certain vested economic, social, and cultural interests. Because of this, tariffs
were traditionally considered a political tool.

Question 20

What does a production possibilities frontier illustrate?

Answer 20

The production possibilities frontier is the set of every combination of goods that is both possible and efficient to produce.

Question 21

What are diminishing marginal returns?

Answer 21

Diminishing marginal returns describe the decreased utility of additional units of a good or service. To take an extreme example, purchasing a haircut when you not had not had one in a while is quite beneficial, but purchasing a second haircut on the same day is unlikely to yield very high utility.

Question 22

What is product efficiency?

Answer 22

Productive efficiency means that is impossible to produce more one good without producing less of some other good.

Question 23

What is allocative efficiency

Answer 23

Means that the combination of goods being produced represents the mix of goods most desired by society.

Question 24

What is the difference between a positive and a normative statement?

Answer 24

A positive statement simply describes an actual result or situation. “If the government raises the minimum wage some jobs will be lost” is a positive statement. A normative statement is a recommendation of a particular policy as either being good or bad. “The government should raise the minimum wage” is a normative statement.

Question 25

what are four responses to the claim that people should not behave in the way described in this chapter?

Answer 25

1) Economics describes behavior as it is, not as we would like it to be
2) Self-interest can be represented as personal choice and freedom
3) Self-interest results in economic efficiency, which ultimately leads to better standards of living
4) Self-interest does not imply that people are never charitable or selfless.