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1. True or False: The source of comparative advantage must be natural elements like climate and
mineral deposits. Explain

False. Anything that leads to different levels of productivity between two economies can
be a source of comparative advantage. For example, the education of workers, the
knowledge base of engineers and scientists in a country, the part of a split-up value
chain where they have their specialized learning, economies of scale, and other factors
can all determine comparative advantage.

2. Brazil can produce 100 pounds of beef or 10 autos. In contrast the United States can produce 40
pounds of beef or 30 autos. Which country has the absolute advantage in beef? Which country has the
absolute advantage in producing autos? What is the opportunity cost of producing one pound of beef in
Brazil? What is the opportunity cost of producing one pound of beef in the United States?

Brazil has the absolute advantage in producing beef and the United States has the
absolute advantage in autos. The opportunity cost of producing one pound of beef is
1/10 of an auto; in the United States it is 3/4 of an auto.

3. In France it takes one worker to produce one sweater, and one worker to produce one bottle of wine.
In Tunisia it takes two workers to produce one sweater, and three workers to produce one bottle of
wine. Who has the absolute advantage in production of sweaters? Who has the absolute advantage in
the production of wine? How can you tell?

In answering questions like these, it is often helpful to begin by organizing the

information in a table, such as in the following table. Notice that, in this case, the
productivity of the countries is expressed in terms of how many workers it takes to
produce a unit of a product.

Country One Sweater One Bottle of wine

France 1 worker 1 worker

Tunisia 2 workers 3 workers

In this example, France has an absolute advantage in the production of both sweaters
and wine. You can tell because it takes France less labor to produce a unit of the good.

4. In Germany it takes three workers to make one television and four workers to make one video
camera. In Poland it takes six workers to make one television and 12 workers to make one video camera.
a. Who has the absolute advantage in the production of televisions? Who has the absolute advantage in
the production of video cameras? How can you tell?
b. Calculate the opportunity cost of producing one additional television set in Germany and in Poland.
(Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in
the production of televisions?
 c. Calculate the opportunity cost of producing one video camera in Germany and in Poland. Which
country has a comparative advantage in the production of video cameras?
d. In this example, is absolute advantage the same as comparative advantage, or not?
e. In what product should Germany specialize? In what product should Poland specialize?

a. In Germany, it takes fewer workers to make either a television or a video camera.

Germany has an absolute advantage in the production of both goods.
b. Producing an additional television in Germany requires three workers. Shifting
those three German workers will reduce video camera production by 3/4 of a
camera. Producing an additional television set in Poland requires six workers,
and shifting those workers from the other good reduces output of video cameras
by 6/12 of a camera, or 1/2. Thus, the opportunity cost of producing televisions is
lower in Poland, so Poland has the comparative advantage in the production of
televisions. Note: Do not let the fractions like 3/4 of a camera or 1/2 of a video
camera bother you. If either country was to expand television production by a
significant amount—that is, lots more than one unit—then we will be talking about
whole cameras and not fractional ones. You can also spot this conclusion by
noticing that Poland’s absolute disadvantage is relatively lower in televisions,
because Poland needs twice as many workers to produce a television but three
times as many to produce a video camera, so the product with the relatively
lower absolute disadvantage is Poland’s comparative advantage.

c. Producing a video camera in Germany requires four workers, and shifting those
four workers away from television production has an opportunity cost of 4/3
television sets. Producing a video camera in Poland requires 12 workers, and
shifting those 12 workers away from television production has an opportunity cost
of two television sets. Thus, the opportunity cost of producing video cameras is
lower in Germany, and video cameras will be Germany’s comparative advantage.
d. In this example, absolute advantage differs from comparative advantage.
Germany has the absolute advantage in the production of both goods, but
Poland has a comparative advantage in the production of televisions.
e. Germany should specialize, at least to some extent, in the production of video
cameras, export video cameras, and import televisions. Conversely, Poland
should specialize, at least to some extent, in the production of televisions, export
televisions, and import video cameras.

5. How can there be any economic gains for a country from both importing and exporting the same
good, like cars?

There are a number of possible advantages of intra-industry trade. Both nations can
take advantage of extreme specialization and learning in certain kinds of cars with
certain traits, like gas-efficient cars, luxury cars, sport-utility vehicles, higher- and lower-
quality cars, and so on. Moreover, nations can take advantage of economies of scale,
so that large companies will compete against each other across international borders,
providing the benefits of competition and variety to customers. This same argument
applies to trade between U.S. states, where people often buy products made by people
of other states, even though a similar product is made within the boundaries of their own
state. All states—and all countries—can benefit from this kind of competition and trade.

6. Table 33.15 shows how the average costs of production for semiconductors (the “chips” in computer
memories) change as the quantity of semiconductors built at that factory increases.
a. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of
production on the vertical axis. How does the curve illustrate economies of scale?
b. If the equilibrium quantity of semiconductors demanded is 90,000, can this economy take full
advantage of economies of scale? What about if quantity demanded is 70,000 semiconductors? 50,000
semiconductors? 30,000 semiconductors?
c. Explain how international trade could make it possible for even a small economy to take full
advantage of economies of scale, while also benefiting from competition and the variety offered by
several producers.

a. The curve illustrates economies of scale by showing that as the scale increases—that is, as
production at this particular factory goes up—the average cost of production declines. The
economies of scale exist up to an output of 40,000 semiconductors; at higher outputs, the
average cost of production does not seem to decline any further.
b. At any quantity demanded above 40,000, this economy can take full advantage of
economies of scale; that is, it can produce at the lowest cost per unit. Indeed, if the quantity
 demanded was quite high, like 500,000, then there could be a number of different factories
all taking full advantage of economies of scale and competing with each other. If the quantity
demanded falls below 40,000, then the economy by itself, without foreign trade, cannot take
full advantage of economies of scale.
c. The simplest answer to this question is that the small country could have a large enough
factory to take full advantage of economies of scale, but then export most of the output. For
semiconductors, countries like Taiwan and Korea have recently fit this description. Moreover,
this country could also import semiconductors from other countries which also have large
factories, thus getting the benefits of competition and variety. A slightly more complex
answer is that the country can get these benefits of economies of scale without producing
semiconductors, but simply by buying semiconductors made at low cost around the world.
An economy, especially a smaller country, may well end up specializing and producing a few
items on a large scale, but then trading those items for other items produced on a large
scale, and thus gaining the benefits of economies of scale by trade, as well as by direct
production.

7. If the removal of trade barriers is so beneficial to international economic growth, why would a nation
continue to restrict trade on some imported or exported products?

A nation might restrict trade on imported products to protect an industry that is important for national
security. For example, nation X and nation Y may be geopolitical rivals, each with ambitions of
increased political and economic strength. Even if nation Y has comparative advantage in the
production of missile defense systems, it is unlikely that nation Y would seek to export those goods
to nation X. It is also the case that, for some nations, the production of a particular good is a key
component of national identity. In Japan, the production of rice is culturally very important. It may be
difficult for Japan to import rice from a nation like Vietnam, even if Vietnam has a comparative
advantage in rice production.