CHAPTER 4
GAINS FROM TRADE
REVIEW GUIDE
Name:_____________________________________________
1. What is specialization? What are the benefits of specialization? What is its impact on trade?
2. How does specialization lead to economic interdependence? Come up with your own example.
3. What’s the difference between specialization and division of labor?
4. What is voluntary exchange? What role does money play in this exchange?
5. How does voluntary exchange relate to “coincidence of wants”?
6. What is a “barter system”?
7. What are some examples of trade barriers? How do they specifically impede trade?
CHAPTER 4
GAINS FROM TRADE
REVIEW GUIDE
8. Define absolute advantage. What gives you an absolute advantage over someone else?
9. Define comparative advantage. What gives you a comparative advantage over someone else?
10. What are some ways that individuals or nations gain a comparative advantage? (ex: Why does Hawaii
make pineapples and Idaho make potatoes? Why are technological industries in the U.S. and lowerskilled jobs in other nations?)
11. How does trade increase the value of a good? Give an example.
12. In the following scenario…
Apples
Oranges
Bobby
15
30
Susie
20
60
OCA
a. Who has the absolute advantage in producing Apples? Oranges?
b. Who has the comparative advantage in producing Apples?
c. Who has the comparative advantage in producing Oranges?
OCO
CHAPTER 4
GAINS FROM TRADE
REVIEW GUIDE
Name:____ANSWER SHEET_________________________________
1. What is specialization? What are the benefits of specialization? What is its impact on trade?
Specialization is becoming an expert (or more efficient) in one particular field or area. Benefits include
improved efficiency, decreased cost, and improved quality of output. Allows for areas to specialize on a
particular product, maximize their output, and then trade with others that are doing the same thing with
other products.
2. How does specialization lead to economic interdependence? Come up with your own example.
Specialization means that you only produce one good or service, so you are unable to do all the other things
that are necessary for survival. This means that you must trade in order to get what you need if you are
specializing.
3. What’s the difference between specialization and division of labor?
Specialization is the developing of skills to become more proficient at one thing. Division of labor is the
decision of how to divide up the tasks in order to allow for specialization.
4. What is voluntary exchange? What role does money play in this exchange?
Willingly trading one item/service for something else of value (often involving the use of money as a
medium of exchange)
5. How does voluntary exchange relate to “coincidence of wants”?
A coincidence of wants is often found in barter economies where specific products are traded. In a market
economy, voluntary exchanges involve the use of money to allow both sides to get what they want.
6. What is a “barter system”?
Specific products are traded for other specific products (no money is used in the exchange).
7. What are some examples of trade barriers? How do they specifically impede trade?
Tariffs – a fee placed on imported goods to drive up their price (hopefully to allow domestic companies a
chance to compete). Examples include the Hawley Smoot Tariff of 1930. Agreements such as NAFTA (the
North American Free Trade Agreement) seek to eliminate trade barriers like tariffs between different
nations.
CHAPTER 4
GAINS FROM TRADE
REVIEW GUIDE
8. Define absolute advantage. What gives you an absolute advantage over someone else?
When someone can produce more of a good or service. When you can produce more than someone
else with all other things remaining equal.
9. Define comparative advantage. What gives you a comparative advantage over someone else?
When you can produce something at a lower opportunity cost than someone else
10. What are some ways that individuals or nations gain a comparative advantage? (ex: Why does Hawaii
make pineapples and Idaho make potatoes? Why are technological industries in the U.S. and lowerskilled jobs in other nations?)
Regions may have a comparative advantage based on the geographical condition of their land. Hawaii
can make pineapples at a lower opportunity cost than other areas because the conditions of the land
make it easier. It costs other nations less to complete assembly-line production when the work-force is
less skilled so they have a comparative advantage in that process.
11. How does trade increase the value of a good? Give an example.
Trade increases the value of a good because it gets products to those who want them most. Value is
determined by each individual, so when a good is in the hands of the individual who wants it most its
value has increased.
12. In the following scenario…
Apples
Oranges
OCA
OCO
Bobby
15
30
2O
1/2A
Susie
20
60
3O
1/3A
a. Who has the absolute advantage in producing Apples? Oranges?
Susie has an absolute advantage in producing Apples and Oranges.
b. Who has the comparative advantage in producing Apples?
Bobby has the comparative advantage because he only gives up 2 oranges to make each apple.
c. Who has the comparative advantage in producing Oranges?
Susie has the comparative advantage because she only gives up 1/3 apples to make each
orange.