Name J o..5 , Q~ /\Q~ Date C-fr/ L .f Zu Period!!

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C o mpa rative Adva ntage Practice

Directions: Answer each of the following in the space provided.
I. Below are hypothetical production possibilities tables for the US and Canada.
us
Product Production Points
A B C D
Real Housewives 0 20 40 60
Bieber-s 15 10 s 0

Canada
Product Production Points
R s T u
Real Housewives 0 20 40 60
Biebe.-s 60 40 20 0

Plot the production possibilities for each of the two countries separately.

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Referring to your graphs answer the following:
. CM1ad tr
a) What is each country' s cost ratio of producing Housewives and Biebers?

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b) Which nation should specialize in which product?

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c) What are the limits of the terms of trade for each product?

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d) On your graph, show the trading possibilities lines for each nation if the actual terms of
trade are I Bieber for 2 Housewives.

e) Suppose the optimum product mixes before specialization and trade were alternative B in
the US and S in Canada. What would be the gains from specialization and trade?
 Period _ _
Date _ _ _ _ _ __
Name _ __ __ _ _ _ _

2. Suppose nation A can produce 80 units of X by using all of its resources to pro<:'uce X or
60 un its o f Y by devoting all of its resources to Y . Comparative figures for nat ion B are
60 o f X and 60 ofY.
a) What is each country ' s cost ratio of producing X and Y?
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b) Assuming cons ant costs, in which product should each nation spec1ahze? Y·
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c) What are the limits of the tenns of trade for both good X and good Y? Jf ==
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X ::::. ;.I_ - )-3.:S
d) Propose an acceptable price for good X in terms of Y for the nation's to agree to

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trade. ·

3. T11ere are 2 islands in the middle of the ocean, and these 2 islands produce fish and
baskets. j!ig Island can produce either I 00 fish per day and O baskets per day or O fish
and 200 baskets per day. Big Island can also produce any combination of fish and
baskets that lies on its linear PPC. SmaH Island can prod14ce either 80 fish per ·day and 0
Jzaskets per da>:: or O fish per day and 80 baskets per day. Small Island has a linear PPC.
a) Draw the PPCs t or each island on a separate graph using fish on the y-axis and
baskets on the x.

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b) What 1s each country s opporturuty cost for producing fish and baskets?
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c) What should each country specialize in? Why?

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d) What are the limits of the terms of trade?

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90

50 ......... .. . .

30

0 20 30 Wfnt 0 50 100 Wint

Use the infomu,tion on the graphs "'1ove tofill in the b1"nlu.

1. The opportunity cost of 1 unit of textiles in the United States is

\ W\f\1 and in Portugal is I/ 3 ~> t

2. The opportunity cost of 1 unit of wine in the United States is

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1ts...... and in Portugal is 3 }&{ t.' Il T

3. Assuming the two countries have identical resources, the United States has an absolute ad-

vantage in Wi Y1 l . Portugal has an absolute advantage in

lrx /i in
4. The United States has a comparative advantage in _...e;lSJL..J..;.;._{]_{_ _ _ _ __

Portugal has a comparative advantage in tl: 4lIll

Fill in the table. Assume that with trade, each counny specialli:es and exports_½ ofits production,

Portugal
lG X; u (/ 5o L
.50 ~1
United
States \DG ·D Sc
Total ''10 60 loG lto \o{) fo
5. What happens to total world output when countries specialize and trade?

6. What is this called? tomr. Mi<J.\115r

0
7. Are the countries better off? Explain. /\JD~ \ti~;,o Joi 03 ,.._, 'CV~