1. Comparative advantage and Gains from Trade

2. CA vs. AA Absolute advantage Can produce the most output
Utilizes fewest inputs
Comparative advantage
Has the lowest opportunity cost

3. WB p. 287, #2 Henry 4 6 John 24 12 Deer Antelope
Number caught per day:
Deer
Antelope
Henry 4 6
John 24 12
Output problem: OOO – Output: Other goes Over
Who has the absolute advantage in catching deer:
Who has the absolute advantage in catching antelope:
Who has the comparative advantage in catching deer:
Who has the comparative advantage in catching antelope:

4. WB p. 287, #2
Number caught per day:
Deer
Antelope
Henry
/4 = 1.5
/6 = .67
John
/24 = .5
/12 = 2
Output problem: OOO – Output: Other goes Over
Who has the absolute advantage in catching deer: John
Who has the absolute advantage in catching antelope: John
Who has the comparative advantage in catching deer: John
Who has the comparative advantage in catching antelope: Henry

5. WB p. 287, #3 XYZ Corp. 8 10 QKFX Corp. 15 12 Cars Planes
Days to produce one unit of each
Cars
Planes
XYZ Corp. 8 10
QKFX Corp. 15 12
Input problem: IOU – Input: Other goes Under
Who has the absolute advantage in producing cars:
Who has the absolute advantage in producing planes:
Who has the comparative advantage in producing cars:
Who has the comparative advantage in producing plans:

6. WB p. 287, #3 XYZ Corp. 8 8/10 = .80 10 10/8 = 1.25 QKFX Corp.
Days to produce one unit of each
Cars
Planes
XYZ Corp.
/10 = .80
/8 = 1.25
QKFX Corp.
/12 = 1.25
/15 = .80
Input problem: IOU – Input: Other goes Under
Who has the absolute advantage in producing cars: XYZ Corp
Who has the absolute advantage in producing planes: XYZ Corp
Who has the comparative advantage in producing cars: XYZ Corp
Who has the comparative advantage in producing plans: QKFX Corp

7. WB p. 290 #1
Complete A - G

8. WB p. 290 #1 Part (H) Terms of trade = 1 ton of oats for 1 bagpipe
Production period = 60 hours
Before specialization Scotland produces:
7.5 tons of oats
6 bagpipes
After specialization and trade with the US, Scotland wants to maintain 6 bagpipes
How many tons of oats will it have?
What are it’s gains from trade?

9. WB p. 290 #1 In 4 hours, Scotland can produce 1 ton of oats
If the production period is 60 hours, how many tons of oats can Scotland produce?
How many tons of oats does Scotland need to trade in order to get 6 bagpipes?
How many tons of oats does Scotland have left after trading oats for bagpipes?
How many tons of oats did Scotland produce before specialization and trade?
Gains from trade = # with spec - # w/o spec

10. WB p. 290 #1 In 4 hours, Scotland can produce 1 ton of oats
If the production period is 60 hours, how many tons of oats can Scotland produce? 15 tons
How many tons of oats does Scotland need to trade in order to get 6 bagpipes? 6 tons
How many tons of oats does Scotland have left after trading oats for bagpipes? 15 – 6 = 9 tons
How many tons of oats did Scotland produce before specialization and trade? 7.5 tons
Gains from trade = # with spec - # w/o spec
Gains from trade = 9 tons – 7.5 tons = 1.5 tons