2 Trade

2.1 the circular-flow model of trade

Review Activities

The Circular Flow Model

Directions: Complete the circular flow model by filling in the missing components.

Problems

No problems for section 2.1.

External Resources

Khan Academy: Circular-Flow Model

2.2 the production possibilities frontier

Review Activities

2.2 Vocabulary

Factors of Production

Directions: Match each good or service with the corresponding factor of production.

PPF Shifts

Directions: Match each shifted PPF with the proper change.

Problems

Problem 2.2.1: Complete the following PPF:

Answers: 10; 115; 40; 25

Problem 2.2.2: Champedder Inc. produces only wine and cheese. Below are combinations of the two goods that can be produced if all of the factors of production are fully utilized. Further, assume the company cannot add factors of production nor will there be any sort of technological improvement unless otherwise stated.

1. Draw the following PPF.
2. Calculate the cost of moving from production combination A to combination B. Then calculate the cost of moving production from combination B to combination C. Finally, calculate the cost of moving production from combination C to combination D.
3. Suppose that a new fermentation decreases the amount of time it takes to produce a gallon of wine. Draw a new PPF. (Note: You do not need to use any exact values for the new PPF.)

Answers: See video; 15/30/55; See video (biased growth with increase in wine)

Problem 2.2.3: An economy produces guns and roses. A new fertilizer allows roses to be grown more efficiently. Show the impact of this innovation on a PPF.
Answers: See video (biased growth allows for increase in maximum rose production.)

Problem 2.2.4: An economy produces guns and roses. Due to a new federal health program, citizens are eating much healthier and as a result are much more efficient. Show the impact of the federal health program on a PPF.
Answers: See video (complete outward shift of PPF).

External Resources

Khan Academy: Production Possibility Curve (or frontier)

Khan Academy: Opportunity Cost

Khan Academy: Increasing Opportunity Cost

2.3 trade and advantage

Review Activities

2.3 Vocabulary

Problems

Problem 2.3.1: England and Scotland both produce sweaters and scones. An English worker can produce 50 scones per hour or 1 sweater per hour. On the other hand, a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. A worker labors for 8 hours per day.

• 1. Create a production schedule that shows the most sweaters and scones each country’s workers could produce if they focused on that single good. This should look just like the table from the class examples.
  2. Draw the PPF for each.
  3. Who has absolute advantage in sweater production? Scone production?
  4. Who has comparative advantage in sweater production? Scone production?
  5. Now, suppose that Scotland produces the good in which they have comparative advantage and trade half of it to England. Further, they agree on an exchange rate of 30 scones per sweater. At the end of the transaction, how many of each good will each country have?
  6. Show the amount each country has on their PPF after the trade (from part 2.)

Answers: See video; See video; Scone=England, Sweaters=Scotland; Scone=England, Sweaters=Scotland; England: 160 scones, 8 sweaters; Scotland: 240 scones, 8 sweaters; see video

Problem 2.3.2:The two countries of Behrendonia and the Republic of Gannon produce widgets and gizmos. The opportunity cost of production is constant (meaning the PPF is linear.) Below is the maximum of each good each country could produce if they focused only on a single good.

1. Draw a properly labeled PPF for each country.
2. Who has absolute advantage in widget production? Gizmo production?
3. Who has comparative advantage in widget production? Gizmo production. Be sure to calculate opportunity costs.
4. Suppose that Behrendonia decides to produce only the good in which they have comparative advantage and trade half of the production to Gannon. If they agree on an exchange rate of 0.7 gizmos per widgets, how many goods will each county end up with after the trade?
5. Show the amount each country has on their PPF after the trade (from part 1.)

Answers: See video; Widget=Behrend, Gizmo=Gannon; Widget=Behrend, Gizmo=Gannon; Behrendonia = 250 Widgets, 75 Gizmos; Gannon = 250 Widgets, 225 Gizmos; See video

Problem 2.3.3: The cities of Boston and Chicago can both produce Red Socks and White Socks. The production schedule below shows the maximum number of each type of sock each city can produce during the course of a day (if they only produce the one type of sock.)

1. Draw a properly labeled PPF for each country.
2. Who has absolute advantage in widget production? Gizmo production?
3. Who has comparative advantage in widget production? Gizmo production. Be sure to calculate opportunity costs.
4. Suppose that Boston decides to produce only the good in which they have comparative advantage and trade half of the production to Chicago. If they agree on an exchange rate of 1.5 white socks per red socks, how many goods will each county end up with after the trade?
5. Show the amount each city has on their PPF after the trade (from part 1.)

Answers: See video; Red Socks = Chicago, White Socks = Chicago; Red Socks = Boston, White Socks = Chicago; Boston = 500 Red, 750 White; Chicago = 500 Red, 2,250 White; See video

Problem 2.3.4: George and Thomas both have the ability to produce hamburgers and pizza. The production schedule below shows the maximum number of each they can produce during the course of a day (if they only produce the one.)

1. Who has comparative advantage in hamburger production? Pizza production? Be sure to calculate opportunity costs.
2. Find the terms of trade for each good; that is, what price would both George and Thomas accept for each good.

Answers: Hamburger = George, Pizza = Thomas; Pizza will be sold (from Thomas to George) between 2.5 and 3 hamburgers per pizza and Hamburgers will be sold (from George to Tom) for between 0.33 and 0.5 pizzas per hamburger.

Problem 2.3.5: Alpha Inc. and the Beta Group both have the ability to produce smartphones and tablets. The production schedule below shows the maximum number of each they can produce during the course of a day (if they only produce the one.)

1. Who has comparative advantage in smartphone production? Tablet production? Be sure to calculate opportunity costs.
2. Find the terms of trade for each good; that is, what price would both Alpha Inc. and the Beta Group accept for each good.

Answers: Alpha = Smartphone, Beta = Tablet; Smartphones will be sold (from Alpha to Beta) for between 0.2 and 0.33 tablets per smartphone and Tablets will be sold (from Beta to Alpha) for between 3 and 5 tablets per smartphone.

Problem 2.3.6: Callahan Auto and Zelinsky Auto Parts both have the ability to produce brakes and rotors. The production schedule below shows the maximum number of each they can produce during the course of a day (if they only produce the one.)

1. Who has comparative advantage in brake production? Rotor production? Be sure to calculate opportunity costs.
2. Find the terms of trade for each good; that is, what price would both Callahan Auto and Zelinsky Auto Parts accept for each good.

Answers: Callahan = Brakes, Zelinsky = Rotors; Brakes will be sold (from Callahan to Zelinsky) for between 0.625 and 0.75 rotors per brake and rotors will be sold (from Zelinsky to Callahan) for between 1.33 and 1.6 brakes per rotor.

Problem 2.3.7: The exchange rate for hotdogs and bratwurst between the United States and Germany is decided to be 2.5 hotdogs per bratwurst. If Germany sends 5,000 bratwurst to the United States, how many hotdogs must the United States send back?

Answer: 12,500 hot dogs

Problem 2.3.8: The exchange rate for coal and natural between Washington and Waynesburg is decided to be 0.75 coal per natural gas. If Washington sends 3,000 coal to Waynesburg, how much natural gas must Waynesburg send back?

Answer: 4,000 natural gas

Problem 2.3.9: The exchange rate for kangaroos and koalas between Queensland and Victoria is decided to be 5 koala per kangaroo. If Queensland sends 200 koalas to Victoria, how many kangaroos must Victoria send back?

Answer: 40 kangaroos

Problem 2.3.10: The exchange rate for spaceships and electric semi trucks between SpaceX and Tesla is decided to be 300 electric semi trucks per spaceship. If SpaceX sends 5 spaceships to Tesla, how many electric semi trucks must Tesla send back?

Answer: 1,500 electric semi trucks

External Resources

Khan Academy: Comparative advantage, specialization, and gains from trade

Khan Academy: Comparative Advantage and Absolute Advantage

Khan Academy: Opportunity cost and comparative advantage using an output table

Khan Academy: Worked Example

Crash Course Economics #2: Specialization and Trade