Topic 1.3 Comparative Advantage and Gains from Trade

Wally can make 40 units of good X or 30 units of good Y in a day, and Sam can make 20 units of good X or 10 units of good Y in a day. Assuming constant trade-offs between good X and good Y, which of the following is true?

• Sam has a comparative advantage in making good X.

• Sam has a comparative advantage in making good Y.

• Wally has a comparative advantage in making both goods.

• Sam has an absolute advantage in making good X.

• Sam has an absolute advantage in making good Y.

Using equal amounts of labor hours, Country X and Country Y can each produce the number of watches and radios shown in the production possibilities curves above. Based on the information, which of the following is true?

• Country X has an absolute advantage in the production of both watches and radios and a comparative advantage in the production of watches.

• Country Y has an absolute advantage in the production of both watches and radios and a comparative advantage in the production of radios.

• Countries X and Y can engage in a mutually advantageous trade by exchanging 1 watch for 1 radio.

• Country Y is willing to give up 2 watches in exchange for 1 radio from Country X.

• Country X is willing to give up 2 radios in exchange for 1 watch from Country Y.

The theory of comparative advantage implies that Alpha would find it advantageous to

• export grain and import steel

• export steel and import grain

• export both grain and steel and import nothing

• import both grain and steel and export nothing

• trade 1 ton of grain for 0.5 ton of steel

The table below shows the production alternatives of Country A and Country B for producing computers and cars with equal amounts of resources that are fully and efficiently employed.

Which of the following is true according to the data in the table?

• Country A has an absolute and comparative advantage in the production of computers.

• Country B has an absolute and comparative advantage in the production of computers.

• Country B should import computers and export cars.

• Since Country B has an absolute advantage in the production of both goods, it will not trade with Country A.

• Neither country can benefit from trade.

The table below indicates the number of labor hours required in Countries X and Y to produce one unit of food or one unit of clothing.

Given this information, which of the following statements is correct?

• X has a comparative advantage in the production of both food and clothing.

• Y has a comparative advantage in the production of both food and clothing.

• X has a comparative advantage in food production, whereas Y has a comparative advantage in clothing production.

• Y has a comparative advantage in food production, whereas X has a comparative advantage in clothing production.

• Neither country has a comparative advantage in the production of either good.

The simplified production possibilities curves for country A and B are shown. Which one of the following statements is correct?

• Country A has the comparative advantage in both goods
• Country A has the comparative advantage in chairs & Country B has the comparative advantage in shirts
• Country B has the absolute advantage in shirts only
• Country A has the comparative advantage in shirts & Country B has the comparative advantage in chairs

Based on the table provided, which one of the following statements is correct?

• Japan has the absolute advantage in producing cars
• Japan has the comparative advantage in producing cars
• The United States has the absolute advantage in producing both cars and computers
• The opportunity cost of producing a car in Japan is 1/2 a computer

Suppose that in one week Sam can knit 5 sweaters or make 4 blankets and Rob can knit 10 sweaters or make 6 blankets. Which of the following is true?

• Sam has an absolute advantage in making blankets
• Sam has neither a comparative nor an absolute advantage in knitting sweaters or making blankets
• Sam has a comparative advantage in making blankets
• Sam has a comparative advantage in knitting sweaters

If nations specialize according to their comparative advantage and engage in trade with each other, each nation can:

• Consume outside its production possibilities curve 
• Produce outside its production possibilities curve 
• Shift its production possibilities curve to the right 
• Produce more of all goods 

Countries will export goods and services that they can produce at lower costs. This is called —

• oligarchy

• monopoly

• comparative advantage

• capitalism