10th exercise list
1- Define absolute and comparative advantage and explain David Ricardo’s idea.
2Brazil needs 4 hours to produce one computer and 8 hours to produce one aircraft. At the same
time, U.S. needs 2 hours to produce one computer and 6 hours to produce one aircraft. Given that
Brazil has 240 labor hours available and U.S. gets 180, answer the following questions:
a)
b)
c)
d)
e)
What is the internal exchange ratio of each country?
Draw the PPF of each country (aircraft should be in the horizontal axis).
Which country has absolute advantage in the production of each good?
What about comparative advantage?
Complete the sentence: Brazil is willing to sell 10 aircrafts for more than ____computers,
while U.S. is willing to get 10 aircrafts for fewer than ____computers.
f) Based on that sentence how can both benefit from free trade (show graphically).
<Q3-Q6> The table below shows the labor-hours needed to Produce One Unit of output
Car
Corn
Labor-Hours
Available
US
20
10
360
UK
12
3
240
3. Which country has an absolute advantage in each good?

_____________ has an absolute advantage in producing cars.

_____________ has an absolute advantage in producing corns.
4. In which good does each country have comparative advantage?

____________ has a comparative advantage in producing cars because the opportunity co
st of producing a car in terms of corn is ________ in US and _________ in UK.

_____________ has a comparative advantage in producing corn because the opportunity
cost of producing a corn in terms of car is ________ in US and _________ in UK.
5. Draw the pre-trade PPF for each country. Also, indicate the point which each country
produces after specialization on the pre-trade PPF by “A” and “B” for US and UK, respectively.
<US>
Car
Corn
<UK>
Car
Corn
6. What is the internal exchange ratio for each country?

In US, 1 car : _________ corns

In UK, 1 car : _________ corns
7- Tariffs and quotas both cause the market price to ___ and the number of imports to ___ when
compared with free trade.
a.
b.
c.
d.
Rise; rise
Rise; fall
Fall; rise
Fall; fall
8- Which of the following is an effect of the imposition of a tariff?
a.
b.
c.
d.
It raises prices
It causes consumers to reduce their purchases of the tariffed good below efficient levels.
It raises revenues for the domestic government
All of above.
Use the following diagrams, which show the production possibility frontiers (ppf’s) for Malaysia
and Sri Lanka, to answer the next questions. Each country has an equal quantity of resources.
Malaysia
Sri Lanka
80
55
40
0
C
40
25
20
A
40 50
Rice
80
0
D
B
60 70 120
Rice
9.
Which of the following statements is true?
(a)
Malaysia has an absolute advantage in the production of rubber; Sri Lanka has an
absolute advantage in the production of rice.
(b)
Sri Lanka has an absolute advantage in the production of rubber; Malaysia has an
absolute advantage in the production of rice.
(c)
Malaysia has an absolute advantage in the production of both goods.
(d)
Sri Lanka has an absolute advantage in the production of both goods.
10.
Which statement is false?
(a)
In Malaysia, the opportunity cost of one unit of rubber is one unit of rice.
(b)
In Malaysia, the opportunity cost of one unit of rice is one unit of rubber.
(c)
In Sri Lanka, the opportunity cost of one unit of rubber is three units of rice.
(d)
In Sri Lanka, the opportunity cost of one unit of rice is three units of rubber.
11.
Which of the following statements is true?
(a)
Malaysia has a comparative advantage in the production of rubber; Sri Lanka has
a comparative advantage in the production of rice.
(b)
Sri Lanka has a comparative advantage in the production of rubber; Malaysia has
a comparative advantage in the production of rice.
(c)
Malaysia has a comparative advantage in both goods.
(d)
Sri Lanka has a comparative advantage in both goods.
12.
Given that Malaysia and Sri Lanka decide to trade,
(a)
Malaysia should specialize in the production of rubber; Sri Lanka should
specialize in the production of rice.
(b)
Malaysia should specialize in the production of rice; Sri Lanka should specialize
in the production of rubber.
(c)
Malaysia and Sri Lanka should each devote half their resources to the production
of each commodity.
(d)
Malaysia should specialize in the production of rubber; Sri Lanka should produce
some rice but continue to produce some rubber.
13.
Before trade, Malaysia produced at Point A on its production possibility frontier and Sri
Lanka produced at Point B. Given complete specialization based on comparative
advantage, total rubber production has risen by
and total rice production has risen
by
.
(a)
80; 120
(b)
120; 80
(c)
40; 60
(d)
20; 20
14.
After trade, Malaysia is consuming at Point C and Sri Lanka is consuming at Point D.
Malaysia is exporting
units of rubber and Sri Lanka is exporting
units of
rice.
(a)
80; 100
(b)
55; 70
(c)
25; 50
(d)
15; 10
15. Comparative and Absolute Advantage:
Amount Produced in 40 Hours:
Mexico
Ireland
Potatoes
2units
40units
Avocados
4units
5units
Production and Consumption without Trade:
Mexico
Ireland
Potatoes
1unit
20units
Avocados
2units
2.5units
15.1 What is the internal exchange rate (opportunity cost in autarky) in each country?
Mexico makes____________P/A (Potatoes per Avocado);
Ireland makes___________ P/A.
15.2 Who has an absolute advantage in producing potatoes?
15.3 Who has an absolute advantage in producing avocados?
15.4 Who has a comparative advantage in producing potatoes?
15.5 Who has a comparative advantage in producing avocados?
15.6 What is a possible exchange rate for trade?
Try to establish an example of trade such that both countries consume more than autarky.
Amount Produced with trade:
Potatoes
Avocados
Potatoes
Avocados
Wine
4
10
Clothing
16
20
Mexico
Ireland
Amount Consumed with trade:
Mexico
Ireland
16. Refer to the Table below
Output per acre:
China
France
Choose the true statement:
a. France has a comparative advantage in both goods.
b. France has a comparative advantage in wine and China has comparative advantage in clothing.
c. France has a comparative advantage in clothing and China has comparative advantage in wine.
d. China has a comparative advantage in both goods.
17- Suppose a worker in Canada can produce 20 cars or 200 computers per month while a
worker in Russia can produce 10 cars or 50 computers per month. For simplicity, assume each
country has only one worker.
a. Draw Canada’s production possibility frontier (PPF) and Russia’s PPF on separate
diagrams. In both cases, put cars per month on the vertical axis and computers per month
on the horizontal axis.
b. What is Canada’s opportunity cost of producing one more computer per month? What is
Canada’s opportunity cost of producing one more car per month? What about Russia?
c. Assume that without trade Canada produces and consumes 5 cars and 150 computers, and
Russia produces and consumes 8 cars and 10 computers. Construct an example of a
possible trade that could make both countries better off.
d. In the example trade you constructed for part (c) what good did Canada specialize in
producing? What about Russia? Is there a relationship between specialization and
opportunity cost? What is it?
e. Over what range of “prices” might these countries trade? For example, what is lowest
price (in terms of computers) that Russia would be willing to accept to produce and
export cars to Canada? What is the highest price (in terms of computers) that Canada
would be willing to pay to import cars from Russia?
ANSWER KEY:
1Comparative advantage is the ability of producing one good with less cost of opportunity than
others, while absolute advantage occurs when a country can produce one good with fewer
resources (or can produce more goods with the same amount of resources) than others. David
Ricardo advocates that one country should be specialized in the production of the good it has the
comparative advantage and even when one country has the absolute advantage in the production
of all goods there’s still space for trade.
2A) Brazil: 1 computer = ½ aircraft
1 aircraft = 2 computers
US:
1 computer =1/3 aircraft
1 aircraft = 3 computers
B)
C) U.S. has the absolute advantage in the production of both goods because it can
produce both with fewer amounts of resources (labor hours)
D) U.S. has comparative advantage in the production of computers (lowers opportunity
cost) and Brazil has comparative advantage in the production of aircrafts.
E) Complete the sentence: Brazil is willing to sell 10 aircrafts for more than 20
computers, while U.S. is willing to get 10 aircrafts for fewer than 30 computers.
F) Using the convenient exchange ratio of 1 aircraft for 2.5 computers, one can show that
both countries can expand their PPFs to the right which means that they can get more of both
goods than in the situation where there is no trade:
3.

UK has an absolute advantage in producing cars.

UK has an absolute advantage in producing corns.

US has a comparative advantage in producing cars because the opportunity cost of produ
4.
cing a car in terms of corn is 2 in US and 4 in UK.

UK has a comparative advantage in producing corn because the opportunity cost of produ
cing a corn in terms of car is 0.5 in US and 0.25 in UK.
5.
<US>
<UK>
6.

In US, 1 car : 2 corns

In UK,1 car : 4 corns
7- b
8- d
9- a
10 - (d)The Sri Lankan opportunity cost of one unit of rice is a third of a unit of rubber.
11 – a
12 - (a) Malaysia’s comparative advantage lies in rubber production; Sri Lanka’s lies in rice.
Each should play to their strength and specialize.
13 – (d)
Total rubber production was 60 (40 + 20); now it is 80. Total rice production was
100 (40 + 60); now it is 120.
14 - (c) Malaysian rubber production is 80, and domestic consumption is 55, leaving 25 for
export. Sri Lankan rice production is 120, and domestic consumption is 70, leaving 50 for
export.
15 15.1 0.5, 8; 15.2 Ireland; 15.3 Ireland; 15.4 Ireland; 15.5 Mexico;
15.6 Exchange rate can be any value from 0.5 to 8 P/A.
Suppose P/A=3 (3 Potatoes trade for 1 Avocado).
Mexico gets 3 potatoes for 1 avocados;
Mexico gives 3 potatoes for 1 avocados;
Amount Produced with trade:
Potatoes
Mexico
0
Ireland
24
Amount Consumed with trade:
Avocados
4
2
Potatoes
3
21
Avocados
3
3
Mexico
Ireland
16 – b
17 –
a)
Each worker can split there time between producing cars and computers.
The PPF will be a straight line in both cases, indicating that the trade-off between producing cars
and computers is constant in Canada and constant in Russia.
b)
Canada: to produce one more computer Canada must give up 1/10 car (i.e., 20/200); to produce
one
more
car
Canada
must
give
up
10
(i.e.,
200/20)
computers
Russia: to produce one more computer Russia must give up 1/5 car (i.e., 10/50); to produce one
more car Russia must give up 5 (i.e., 50/10) computers
c)
One possible trade that would work is that Canada produces 160 cars and 4 cars; Russia produces
9 cars and 5 computers. Then Canada trades 6 computers for one car. The result is Canada
consumes 5 cars and 154 computers and Russia consumes 8 cars and 11 computers.
d)
Canada specialized on computer production and Russia specialized in car production. Make it
clear that specialization just means moving in the direction of producing more of that good. It is
not the same as full specialization where a country would produce only one good.
For trade to be beneficial each country must specialize in producing the good for which they
have the lowest opportunity cost.
e)
The least amount of computers that Russia would be willing to accept for producing and
exporting a car is 5. Any less than this a Russia may as well produce the car itself. Similarly, the
most computers Canada would be willing to pay to import a car is 10. Any more than this an
Canada may as well produce the car itself.