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ECON 340 PRACTICE QUIZ 1 Name: ___________________________ 1. When does a nation have comparative advantage in producing a good? TABLE 1 Cars Soap Output per Worker Brazil 5 30 Costa Rica 2 8 Use Table 1 and the Ricardian Model of trade to answer Questions 2 – 10. 2. Which country has absolute advantage in the production of soap? Which country has absolute advantage in the production of cars? 3. Under autarky, what are the relative prices of cars and soap in each country? 1 4. Which country has comparative advantage in cars? Which country has comparative advantage in soap? How do you know? (ie: show your work) 5. If Brazil and Costa Rica trade, which good would you expect Costa Rica to produce? Why? 6. What are the upper and lower bounds for the terms of trade between Brazil and Costa Rica for cars? 2 7. Draw the PPC for Costa Rica, with cars on the horizontal axis. Assume that Costa Rica has 100 workers (ie: maximum soap production is 8*100 = 800). Clearly label Costa Rica’s expected production point under trade. 8. Assume that Costa Rica and Brazil settle on a price of 5 units of soap per car. Use this price to draw in the terms of trade (TT) line on your diagram in Question 7 (or re-draw below). Label clearly! 9. Describe in words what the TT line shows. 3 10. Suppose that Costa Rica consumes 100 cars. How much soap can Costa Rica consume if they specialize and trade with Brazil? Sketch Costa Rica’s PPF again below, including the TT line and Costa Rica’s consumption bundle under trade. Is Costa Rica better off? How can you tell? 11. Given the following table, which country is relatively more labor abundant? Which is relatively land abundant? Show how you know. Russia China Land 400 acres 1000 acres Labor 20 workers 100 workers 12. Suppose that production of a unit of wheat requires 5 acres of land and 1 worker. Production of a unit of clothing requires 10 acres of land and 5 workers. Which good is land intensive? Which good is labor intensive? Show how you know. 4 13. If the factor endowments are as given in Question 11, which country, Russia or China, will export wheat? Which country will export clothing? Why? 14. Use the Stolper-Samuelson theorem to comment on the whether land owners in China are likely to favor trade with Russia. 15. What will happen to the price of clothing in Russia if the two nations trade? Explain. 5 16. Suppose that there are three factors: land, labor, and capital. Production of lettuce requires land and labor. Production of scooters requires capital and labor. Which factors are variable, and which are specific? 17. Suppose France’s endowments are 500 land and 20 capital, and Holland’s endowments are 5 land and 15 capital. Under trade, which good (from Question 16) does each country export? 18. How does trade affect the income of French land owners? Dutch land owners? 6
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Surname [1]
Student’s Name
Professor’s Name
Economics
18 September 2017
Economics Quiz
1. When does a nation have comparative advantage in producing a good?

When the nation produces a good at a lower opportunity cost than other nations.

TABLE 1
Output per Worker
Cars
Soap

Brazil
5
30

Costa Rica
2
8

Use Table 1 and the Ricardian Model of trade to answer Questions 2 – 10.

2. Which country has absolute advantage in the production of soap? Which country has

absolute advantage in the production of cars?
Brazil has absolute advantage in the production of both soap and cars.

3. Under autarky, what are the relative prices of cars and soap in each country?

Surname [2]

Notably, in autarky, relative prices are equal to the opportunity cost of production.
Assuming that brazil is home and Costa Rica be foreign:
Brazil: Pc/Ps=ac/as=5 cars/30 soap
Costa Rica: P*c/P*s=a*c/a*s= 2/8= 1 car/ 4 soap

4. Which country has comparative advantage in cars? Which country has comparative

advantage in soap? How do you know? (i.e.: show your work)

A country has a comparative advantage if it has a lower ULC than...


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