Deck 3: Interdependence and the Gains From Trade

Question 1

Production possibilities frontiers cannot be used to illustrate trade-offs.

Answer 1

False

Question 2

An assumption of the production possibilities frontier model is that technology is fixed.

Answer 2

True

Question 3

Opportunity cost refers to how many inputs a producer requires to produce a good.

Answer 3

False

Question 4

Opportunity cost measures the trade-off between two goods that each producer faces.

Question 5

For a country producing two goods, the opportunity cost of one good will be the inverse of the opportunity cost of the other good.

Question 6

In most countries today, many goods and services consumed are imported from abroad, and many goods and services produced are exported to foreign customers.

Question 7

Assume a farmer has the ability to produce corn and/or beans. Whenever the farmer spends 1 hour less producing corn and 1 hour more producing beans, he reduces his output of corn by 2 bushels and raises his output of beans by 3 bushels. In view of these assumptions, the farmer's production possibilities frontier is bowed out.

Question 8

Jake can complete an oil change in 45 minutes and he can write a poem in 90 minutes. Ming-la can complete an oil change in 30 minutes and she can write a poem in 90 minutes. Jake's opportunity cost of writing a poem is lower than Ming-la's opportunity cost of writing a poem.

Question 9

Trade allows a country to consume outside its production possibilities frontier.

Question 10

Interdependence among individuals and interdependence among nations are both based on the gains from trade.

Question 11

It is possible for the U.S. to gain from trade with Germany even if it takes U.S. workers fewer hours to produce every good than it takes German workers.

Question 12

An economy can produce at any point on or inside its production possibilities frontier, but it cannot produce at points outside its production possibilities frontier.

Question 13

If a person chooses self-sufficiency, then she can only consume what she produces.

Question 14

In one month, Moira can knit 2 sweaters or 4 scarves. In one month, Tori can knit 1 sweater or 3 scarves. Moira's opportunity cost of knitting scarves is lower than Tori's opportunity cost of knitting scarves.

Question 15

A production possibilities frontier is a graph that shows the combination of outputs that an economy should produce.

Question 16

The production possibilities frontier shows the trade-offs that the producer faces but does not identify the choice the producer will make.

Question 17

Suppose that in one hour Dewey can produce either 10 bushels of corn or 20 yards of cloth. Dewey's opportunity cost of producing one bushel of corn is 1/2 yard of cloth.

Question 18

Henry can make a bird house in 3 hours and he can make a bird feeder in 1 hour. The opportunity cost to Henry of making a bird house is 1/3 bird feeder.

Question 19

To produce 100 bushels of wheat, Farmer A requires fewer inputs than does Farmer B. We can conclude that Farmer A has an absolute advantage over Farmer B in producing wheat.

Question 20

If Wrex can produce more math problems per hour and more book reports per hour than Maxine can, then Wrex cannot gain from trading math problems and book reports with Maxine.

Question 21

Zora can produce 4 quilts in a week and she can produce 1 corporate website in a week. Lou can produce 9 quilts in a week and he can produce 2 corporate websites in a week. Zora has the comparative advantage in quilts and the absolute advantage in neither good, while Lou has the comparative advantage in corporate websites and the absolute advantage in both goods.

Question 22

If one producer has the absolute advantage in the production of all goods, then that same producer will have the comparative advantage in the production of all goods as well.

Question 23

Unless two people who are producing two goods have exactly the same opportunity costs, then one person will have a comparative advantage in one good, and the other person will have a comparative advantage in the other good.

Question 24

Differences in opportunity cost allow for gains from trade.

Question 25

Suppose Hank and Tony can both produce corn. If Hank's opportunity cost of producing a bushel of corn is 2 bushels of soybeans and Tony's opportunity cost of producing a bushel of corn is 3 bushels of soybeans, then Hank has the comparative advantage in the production of corn.

Question 26

Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

Question 27

The principle of comparative advantage states that, regardless of the price at which trade takes place, everyone will benefit from trade if they specialize in the production of the good for which they have a comparative advantage.

Question 28

In an economy consisting of two people producing two goods, it is possible for one person to have the absolute advantage and the comparative advantage in both goods.

Question 29

If one producer is able to produce a good at a lower opportunity cost than some other producer, then the producer with the lower opportunity cost is said to have an absolute advantage in the production of that good.

Question 30

It takes Ross 6 hours to produce a bushel of corn and 2 hours to wash and polish a car. It takes Courtney 6 hours to produce a bushel of corn and 1 hour to wash and polish a car. Courtney and Ross cannot gain from specialization and trade, since it takes each of them 6 hours to produce 1 bushel of corn.

Question 31

Harry is a computer company executive, earning $200 per hour managing the company and promoting its products. His daughter Quinn is a high school student, earning $6 per hour helping her grandmother on the farm. Harry's computer is broken. He can repair it himself in one hour. Quinn can repair it in 10 hours. Harry's opportunity cost of repairing the computer is lower than Quinn's.

Question 32

Timmy can edit 2 pages in one minute and he can type 80 words in one minute. Olivia can edit 1 page in one minute and she can type 100 words in one minute. Timmy has an absolute advantage and a comparative advantage in editing, while Olivia has an absolute advantage and a comparative advantage in typing.

Question 33

Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods.

Question 34

It takes Anne 3 hours to make a pie and 4 hours to make a shirt. It takes Mary 2 hours to make a pie and 5 hours to make a shirt. Anne should specialize in making shirts and Mary should specialize in making pies, and they should trade.

Question 35

Ellie and Brendan both produce apple pies and vanilla ice cream. If Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream, Ellie has a comparative advantage in the production of ice cream.

Question 36

In one month, Moira can knit 2 sweaters or 4 scarves. In one month, Tori can knit 1 sweater or 3 scarves. Together, they could produce more output in total if Moira knits only sweaters and Tori knits only scarves.

Question 37

When there are two people and each is capable of producing two goods, it is possible for one person to have a comparative advantage over the other in both goods.

Question 38

The gains from specialization and trade are based on absolute advantage.

Question 39

If a country has the comparative advantage in producing a product, then that country must also have the absolute advantage in producing that product.

Question 40

Fred trades 2 tomatoes to Barney in exchange for 1 pumpkin. Fred and Barney both gain from the exchange. We can conclude that, for Barney, the opportunity cost of producing 1 pumpkin is greater than 2 tomatoes.

Question 41

Ellie and Brendan both produce apple pies and vanilla ice cream. If Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream, a mutually advantageous trade can be struck at a price of one apple pie for 1/3 gallon of ice cream.

Question 42

If US workers can produce everything in less time than Mexican workers, it is not possible for the US to gain from trade with Mexico.

Question 43

Goods produced abroad and sold domestically are called exports and goods produced domestically and sold abroad are called imports.

Question 44

Trade allows all countries to achieve greater prosperity.

Question 45

Trade allows a person to obtain goods at prices that are less than that person's opportunity cost because each person specializes in the activity for which he or she has the lower opportunity cost.

Question 46

As long as two people have different opportunity costs, each can gain from trade with the other, since trade allows each person to obtain a good at a price lower than his or her opportunity cost.

Question 47

For international trade to benefit a country, it must benefit all citizens of that country.

Question 48

Specialization and trade can make everyone better off if a person can obtain goods at prices that are less than that person's opportunity cost.

Question 49

Adam Smith was the author of the 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.

Question 50

​The production possibilities frontier (PPF) depicts the combinations of goods that provides society with the maximum possible benefit.

Question 51

International trade can make some individuals within a country worse off, even as it makes the country as a whole better off.

Question 52

When each person specializes in producing the good in which he or she has a comparative advantage, each person can gain from trade but total production in the economy is unchanged.

Question 53

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

Question 54

International trade may make some individuals in a nation better off, while other individuals are made worse off.

Question 55

Adam Smith wrote that a person should never attempt to make at home what it will cost him more to make than to buy.

Question 56

Some countries win in international trade, while other countries lose.

Question 57

If a country has a lower opportunity cost than its potential trading partner, the country should decide to be self-sufficient.

Question 58

For both parties to gain from trade, the price at which they trade must lie exactly in the middle of the two opportunity costs.

Question 59

David Ricardo was the author of the 1817 book Principles of Political Economy and Taxation.

Question 60

Adam Smith developed the theory of comparative advantage as we know it today.

Question 61

​Trade between nations is based on absolute advantage, which occurs when a country has a lower opportunity cost of producing a good.

Question 62

Under what conditions is an economy's production possibilities frontier also its consumption possibilities frontier?

Question 63

Figure 3-6
The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time.
Greg's Production Possibilities
Catherine's Production Possibilities ​
Refer to Figure 3-6. Is it possible for Greg and Catherine to gain from trade? Defend your answer.

Question 64

Suppose that Venezuela produces beef and oil and it can switch production between each at a constant rate. If the most beef it can produce is 300 million pounds and the most oil it can produce is 50 million barrels, then what is the opportunity cost of a pound of beef and what is the opportunity cost of a barrel of oil?

Question 65

​Trade does not benefit a nation if that nation has a comparative advantage in the production of that good.

Question 66

Figure 3-6
The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time.
Greg's Production Possibilities
Catherine's Production Possibilities ​
Refer to Figure 3-6. What is Greg's opportunity cost of producing cake? Explain how you derived your answer.

Question 67

Figure 3-6
The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time.
Greg's Production Possibilities
Catherine's Production Possibilities ​
Refer to Figure 3-6. Which if any good(s) does Greg have an absolute advantage producing?

Question 68

​Whenever a country has an absolute advantage in the production of a good, that implies that the country should specialize in the production of that good.

Question 69

​A country can have a comparative advantage in the production of a good, even if it does not have an absolute advantage in the production of that good.

Question 70

Trade can only benefit a nation if that nation has an absolute advantage in the production of that good.
​

Question 71

​If a country has a higher opportunity cost to produce a good, that means that this country can never possess a comparative advantage in the production of any good.

Question 72

​When it is said that trade between nations can make both sides of the trade better off, this means that all citizens in each nation will benefit.

Question 73

Figure 3-6
The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time.
Greg's Production Possibilities
Catherine's Production Possibilities ​
Refer to Figure 3-6. Which if any good(s) does Catherine have an absolute advantage producing?

Question 74

Charlotte can produce pork and beans and can switch between producing them at a constant rate. If it takes her 10 hours to produce a pound of pork and 5 hours to produce a pound of beans, what is her opportunity cost of pork and what is her opportunity cost of beans?

Question 75

Figure 3-6
The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time.
Greg's Production Possibilities
Catherine's Production Possibilities ​
Refer to Figure 3-6. What is Greg's opportunity cost of producing ice cream? Explain how you derived your answer.

Question 76

What does a production possibilities frontier represent?

Question 77

​The production possibilities frontier (PPF) illustrates the combinations of goods that society can consume when trading with other producers.

Question 78

Figure 3-6
The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time.
Greg's Production Possibilities
Catherine's Production Possibilities ​
Refer to Figure 3-6. What is Catherine's opportunity cost of producing ice cream? Explain how you derived your answer.

Question 79

​Whenever a nation is producing on its PPF, that nation will be using all of its available resources.

Question 80

Figure 3-6
The production possibilities frontiers below show how much Greg and Catherine can each produce in 8 hours of time.
Greg's Production Possibilities
Catherine's Production Possibilities ​
Refer to Figure 3-6. What is Catherine's opportunity cost of producing cake? Explain how you derived your answer.