Mr. MaurerName: ______

AP Economics (Macro)

Comparative Advantage and Trade (Review)

Problem Set

1. Using equal amounts of labor hours, Country X and Country Y can each produce the number of snowmobiles and cars shown in the production possibilities curves shown above. Based on this information, answer the following questions:

a. Which country has absolute advantage in producing cars? ______

b. Which country has absolute advantage in producing snowmobiles?______

c. What is the opportunity cost of producing one car in Country X?______

d. What is the opportunity cost of producing one snowmobile in Country X? ______

e. What is the opportunity cost of producing one car in Country Y?______

f. What is the opportunity cost of producing one snowmobile in Country Y? ______

g. Which country has comparative advantage in producing cars? ______

h. Which country has comparative advantage in producing snowmobiles? ______

i. Which country should produce and export cars?______

j. Which country should produce and export snowmobiles?______

k. Define the terms of trade that would be beneficial to both countries.

2. What does the concept of comparative advantage imply about trade between two nations?

3. According to the production possibilities curve at left, if the economy is currently producing 20 units of Good A and 180 units of Good B, what is the opportunity cost of increasing the production of Good A from 20 units to 40 units?

4. Use the graph above to answer the following:

a. What is the opportunity cost of producing 1 barrel of oil in Country A? ______

b. What is the opportunity cost of producing 1 barrel of oil in Country B? ______

c. What is the opportunity cost of producing 1 ton of grain in Country A? ______

d. What is the opportunity cost of producing 1 ton of grain in Country B? ______

e. Which country has absolute advantage in producing oil? ______

f. Which country has absolute advantage in producing grain? ______

g. Which country has comparative advantage in producing oil? ______

h. Which country has comparative advantage in producing grain? ______

i. Which country should produce and export oil?______

j. Which country should produce and export grain?______

k. Define the terms of trade that would be beneficial to both countries.

5. The table below shows the production alternatives of Country A and Country B for producing boats and trucks with equal amounts of resources that are fully and efficiently employed.

Country / Boats / Trucks
A / 12 / 0
0 / 6
B / 24 / 0
0 / 8

a. What is the opportunity cost of producing 1 boat in Country X? ______

b. What is the opportunity cost of producing 1 boat in Country Y? ______

c. What is the opportunity cost of producing 1 truck in Country X? ______

d. What is the opportunity cost of producing 1 truck in Country Y? ______

e. Which country has absolute advantage in producing boats? ______

f. Which country has absolute advantage in producing trucks? ______

g. Which country has comparative advantage in producing boats? ______

h. Which country has comparative advantage in producing trucks? ______

i. Which country should produce and export boats?______

j. Which country should produce and export trucks?______

k. Define the terms of trade that would be beneficial to both countries.

Pots / Pans
Country X / 50 / 50
Country Y / 10 / 40

6. According to the table above:

a. What is the opportunity cost of producing 1 pot in Country X? ______

b. What is the opportunity cost of producing 1 pot in Country Y? ______

c. What is the opportunity cost of producing 1 pan in Country X? ______

d. What is the opportunity cost of producing 1 pan in Country Y? ______

e. Which country has absolute advantage in producing pots? ______

f. Which country has absolute advantage in producing pans? ______

g. Which country has comparative advantage in producing pots? ______

h. Which country has comparative advantage in producing pans? ______

i. Which country should produce and export pots?______

j. Which country should produce and export pans?______

k. Define the terms of trade that would be beneficial to both countries.

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7. Use the previous six problems to state a generalization about comparative advantage, specialization, and trade that answers these questions:

What is comparative advantage?

When can two countries mutually benefit from specialization and trade?

What terms of trade will be beneficial to both countries?