Unit 7: The World Economy Introduction
Module 15: Trade Among Nations
*Costs and Benefits of Free Trade
*Why Nations Trade
*Absolute Advantage
Table 17.1: Example of absolute advantage
Windows per Hour Square Yards of Leaves
per Hour
Emma 4 6
Michael 2 8
*Comparative Advantage
Table 17.2: Example of comparative advantage
Windows per Hour Square Yards of Leaves
per Hour
Emma 4 6
Michael 1 4
Table 17.3: Inland and Outland
Country Steel (tons) Cloth (bolts)
Inland 50 75
,Outland 20 60
World total 70 135
Figure 17.1: Production possibilities curves for Inland and
Outland
*The production possibilities curve illustrates the gains from specializing on the basis of
comparative advantage. Each country moves from pre-trade production and consumption (Point
A) to output with specialization (Point B) and then to consumption after trade (Point C).
Alternative version
Inland’s opportunity cost of 1 ton of steel is calculated as follows:
75 tons of steel = 225 bolts of cloth
(75/75) steel = (225/75) bolts
1 ton of steel = 3 bolts of cloth
For each trading partner, their opportunity costs are reciprocals of each other. Inland’s
opportunity cost of 1 bolt of cloth is one-third of a ton of steel.
Table 17.4: Production before and after specialization
Before Specialization
After Specialization
Country Steel (tons) Cloth (bolts) Steel (tons) Cloth (bolts)
Inland 50 75 75 0
, Outland 20 60 0 180
World total 70 135 75 180
Total world output has increased, without using additional resources, by 5 tons of steel and 45
bolts of cloth. Are the two countries better off? Not yet. After all, they could have been
producing those combinations anyway. It is only after trade that they can be better off.
1. Based on the data in the table below, the opportunity cost per computer is
100
bushels of wheat in Country A.
Correct. Country A can produce either 100 computers or 10,000 bushels of wheat by fully utilizing
available resources and technology. Devoting resources to computer production means giving up wheat
production. Since 10,000 bushels of wheat are given up to gain 100 computers, the opportunity cost is
10,000/100, or 100 bushels of wheat.
2. Based on the data in the table below, the opportunity cost per computer is
110
bushels of wheat in Country B.
Correct. Country A can produce either 125 computers or 13,750 bushels of wheat by fully utilizing
available resources and technology. Devoting resources to computer production means giving up wheat
production. Since 13,750 bushels of wheat are given up to gain 125 computers, the opportunity cost is
13,750/125, or 110 bushels of wheat.
3. "Fill in the blank" question: Based on the data in the table above, Country A has an absolute
advantage in the production of neither and a comparative advantage in the production of
computers.
Module 15: Trade Among Nations
*Costs and Benefits of Free Trade
*Why Nations Trade
*Absolute Advantage
Table 17.1: Example of absolute advantage
Windows per Hour Square Yards of Leaves
per Hour
Emma 4 6
Michael 2 8
*Comparative Advantage
Table 17.2: Example of comparative advantage
Windows per Hour Square Yards of Leaves
per Hour
Emma 4 6
Michael 1 4
Table 17.3: Inland and Outland
Country Steel (tons) Cloth (bolts)
Inland 50 75
,Outland 20 60
World total 70 135
Figure 17.1: Production possibilities curves for Inland and
Outland
*The production possibilities curve illustrates the gains from specializing on the basis of
comparative advantage. Each country moves from pre-trade production and consumption (Point
A) to output with specialization (Point B) and then to consumption after trade (Point C).
Alternative version
Inland’s opportunity cost of 1 ton of steel is calculated as follows:
75 tons of steel = 225 bolts of cloth
(75/75) steel = (225/75) bolts
1 ton of steel = 3 bolts of cloth
For each trading partner, their opportunity costs are reciprocals of each other. Inland’s
opportunity cost of 1 bolt of cloth is one-third of a ton of steel.
Table 17.4: Production before and after specialization
Before Specialization
After Specialization
Country Steel (tons) Cloth (bolts) Steel (tons) Cloth (bolts)
Inland 50 75 75 0
, Outland 20 60 0 180
World total 70 135 75 180
Total world output has increased, without using additional resources, by 5 tons of steel and 45
bolts of cloth. Are the two countries better off? Not yet. After all, they could have been
producing those combinations anyway. It is only after trade that they can be better off.
1. Based on the data in the table below, the opportunity cost per computer is
100
bushels of wheat in Country A.
Correct. Country A can produce either 100 computers or 10,000 bushels of wheat by fully utilizing
available resources and technology. Devoting resources to computer production means giving up wheat
production. Since 10,000 bushels of wheat are given up to gain 100 computers, the opportunity cost is
10,000/100, or 100 bushels of wheat.
2. Based on the data in the table below, the opportunity cost per computer is
110
bushels of wheat in Country B.
Correct. Country A can produce either 125 computers or 13,750 bushels of wheat by fully utilizing
available resources and technology. Devoting resources to computer production means giving up wheat
production. Since 13,750 bushels of wheat are given up to gain 125 computers, the opportunity cost is
13,750/125, or 110 bushels of wheat.
3. "Fill in the blank" question: Based on the data in the table above, Country A has an absolute
advantage in the production of neither and a comparative advantage in the production of
computers.
