2.1 CHAPTER REVIEW

FACTS AND TOOLS

Question 2.4

1. Use the idea of the “division of knowledge” to answer the following questions:

  1. Which country has more knowledge: Utopia, where in the words of Karl Marx, each person knows just enough about hunting, fishing, and cattle raising to “hunt in the morning, fish in the afternoon, [and] rear cattle in the evening,” or Drudgia, where one-third of the population learns only about hunting, one-third only about fishing, and one-third only about cattle raising?

  2. Which planet has more knowledge: Xeroxia, each of whose 1 million inhabitants knows the same list of 1 million facts, or Differentia, whose 1 million inhabitants each know a different set of 1 million facts? How many facts are known in Xeroxia? How many facts are known in Differentia?

Question 2.5

2. In The Wealth of Nations, Adam Smith said that one reason specialization makes someone more productive is because “a man commonly saunters a little in turning his hand from one sort of employment to another.” How can you use this observation to improve your pattern of studying for your four or five college courses this semester?

Question 2.6

3. Opportunity cost is one of the tougher ideas in economics. Let’s make it easier by starting with some simple examples. In the following examples, find the opportunity cost: Your answer should be a rate, as in “1.5 widgets per year” or “6 lectures per month.” Ignoring Adam Smith’s insight from the previous question, assume that these relationships are simple linear ones, so that if you put in twice the time, you get twice the output, and half the time yields half the output.

  1. Erin has a choice between two activities: She can repair one transmission per hour or she can repair two fuel injectors per hour. What is the opportunity cost of repairing one transmission?

  2. Katie works at a customer service center and every hour she has a choice between two activities: answering 200 telephone calls per hour or responding to 400 emails per hour. What is the opportunity cost of responding to 400 phone calls?

  3. Deirdre has a choice between writing one more book this year or five more articles this year. What is the opportunity cost of writing half of a book this year, in terms of articles?

Question 2.7

4.

  1. American workers are commonly paid much more than Chinese workers. True or false: This is largely because American workers are typically more productive than Chinese workers.

  2. Julia Child, an American chef (and World War II spy) who reintroduced French cooking to Americans in the 1960s, was paid much more than most American chefs. True or false: This was largely because Julia Child was much more productive than most American chefs.

Question 2.8

5. According to the Wall Street Journal (August 30, 2007, “In the Balance”), it takes about 30 hours to assemble a vehicle in the United States. Let’s use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, “North” is shorthand for the high-tech developed countries of East Asia, North America, and Western E urope, while “South” is shorthand for the rest of the world. Let’s use that shorthand here.

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  1. Consider the following productivity table: Which region has an absolute advantage at making high-quality cars? Low-quality cars?

     

    Number of Hours to Make One High-Quality Car

    Number of Hours to Make One Low-Quality Car

    North

    30

    20

    South

    60

    30

  2. Using the information in the productivity table, estimate the opportunity cost of making high-or low-quality cars in the North and in the South. Which region has a comparative advantage (i.e., lowest opportunity cost) for manufacturing high-quality cars? For low-quality cars?

     

    Opportunity Cost of Making One High-Quality Car

    Opportunity Cost of Making One Low-Quality Car

    North

    ___ low-quality cars

    ___ high-quality cars

    South

    ___ low-quality cars

    ____ high-quality cars

  3. One million hours of labor are available for making cars in the North, and another 1 million hours of labor are available for making cars in the South. In a no-trade world, let’s assume that two-thirds of the auto industry labor in each region is used to make high-quality cars and one-third is used to make low-quality cars. Solve for how many of each kind of car will be produced in the North and South, and add up to determine the total global output of each type of car. (Why will both kinds of cars be made? Because the low-quality cars will be less expensive.)

     

    Output of High-Quality Cars

    Output of Low-Quality Cars

    North

     

     

    South

     

     

    Global output

     

     

  4. Now allow specialization. If each region completely specializes in the type of car in which it holds the comparative advantage, what will the global output of high-quality cars be? Of low-quality cars? In the following table, report your answers. Is global output in each kind of car higher than before? (We’ll solve a problem with the final step of trade in the Thinking and Problem Solving section.)

     

    Output of High-Quality Cars

    Output of Low-Quality Cars

    North

     

     

    South

     

     

    Global output

     

     

Question 2.9

6. It has been reported that John Lennon was once asked whether Ringo was the best drummer in the world, and he quipped, “He’s not even the best drummer in the Beatles!” (Paul also drummed on some of the White Album.) Assuming that this story is true and that Lennon was correct, explain, using economics, why it could still make sense to have Ringo on drums.

THINKING AND PROBLEM SOLVING

Question 2.10

1. Fit each of the following examples into one of these reasons for trade:

  1. Division of knowledge

  2. Comparative advantage

  3. Two recently abandoned cats, Bingo and Tuppy, need to quickly learn how to catch mice in order to survive. If they also remain well groomed, they stand a better chance of surviving: Good grooming reduces the risk of disease and parasites. Each cat could go it alone, focusing almost exclusively on learning to catch mice. The alternative would be for Bingo to specialize in learning how to groom well and for Tuppy to specialize in learning how to catch mice well.

  4. President Barack Obama, a graduate of Harvard Law, hires attorneys who are less skilled than himself to do routine legal work.

Question 2.11

2. Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both “true and not obvious.” Since it’s not obvious, we should practice with it a bit. In each of the cases, who has the absolute advantage at each task, and who has the comparative advantage?

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  1. In 30 minutes, Kana can either make miso soup or she can clean the kitchen. In 15 minutes, Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen.

  2. In one hour, Ethan can bake 20 cookies or lay the drywall for two rooms. In one hour, Sienna can bake 100 cookies or lay the drywall for three rooms.

  3. Kara can build two glass sculptures per day or she can design two full-page newspaper advertisements per day. Sara can build one glass sculpture per day or design four full-page newspaper ads per day.

  4. Data can write 12 excellent poems per day or solve 100 difficult physics problems per day. Riker can write one excellent poem per day or solve 0.5 difficult physics problems per day.

Question 2.12

3. The federal education reform law known as No Child Left Behind requires every state to create standardized tests that measure whether students have mastered key subjects. Since the same test is given to all students in the same grade in the state, this encourages all schools within a state to cover the same material. According to the division of knowledge model, what are the costs of this approach?

Question 2.13

4. In this chapter, we’ve often emphasized how specialization and exchange can create more output. But sometimes the output from voluntary exchange is difficult to measure and doesn’t show up in GDP statistics. In each of the following cases, explain how the two parties involved might be able to make themselves both better off just by making a voluntary exchange.

  1. Alan received two copies of Gears of War as birthday gifts. Burton received two copies of Halo as birthday gifts.

  2. Jeb has a free subscription to Field and Stream but isn’t interested in hunting. George has a free subscription to the Miami Herald but isn’t all that interested in Florida news.

  3. Pat has a lot of love to give, but it is worthless unless received by another. Terry is in the same sad situation.

Question 2.14

5. Many people talk about manufacturing jobs leaving the United States and going to other places, like China. Why isn’t it possible for all jobs to leave the United States and go overseas (as some people fear)?

Question 2.15

6. Suppose the following table shows the number of labor hours needed to produce airplanes and automobiles in the United States and South Korea, but one of the numbers is unknown.

 

Number of Hours to Produce One Airplane

Number of Hours to Produce One Auto

South Korea

2,000

?

United States

   800

5

  1. Without knowing the number of labor hours required to produce an auto in South Korea, you can’t figure out which country has the comparative advantage in which good. Can you give an example of a number for the empty cell of the table that would give the United States the comparative advantage in the production of airplanes? What about South Korea?

  2. Who has the absolute advantage in the production of airplanes? What about autos?

  3. What exact number would you have to place in the empty cell of the table for it to be impossible that trade between the United States and South Korea could benefit both nations?

Question 2.16

7. In the chapter, you saw how to create a production possibilities frontier for the United States and Mexico. Let’s take a look at how to combine these PPFs to make one PPF for the U.S.–Mexico trade alliance. You’ll use the same set of axes that was used in the chapter: computers on the vertical axis and shirts on the horizontal axis. Refer to Figure 2.1 and Table 2.1 as needed.

  1. First, you need to plot the endpoints of the PPF by figuring out the maximum numbers of computers and shirts. If both the United States and Mexico produced only computers, how many would they produce? What if they only produced shirts? Plot these two points and label them as A (all computers) and Z (all shirts). The PPF for the U.S.–Mexico trade alliance is going to look a little different from the PPFs for the individual countries, so we don’t want to simply connect the two points with a straight line. We need to figure out the rate at which the U.S.–Mexico trade alliance gives up computers to get shirts (or vice versa).

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  2. Starting at point A, if citizens of the United States or Mexico decided they wanted more shirts, where would those shirts be produced? Why? What do you think the PPF should look like as the U.S.–Mexico trade alliance initially moves away from point A?

  3. Starting at point Z, if citizens of the United States or Mexico decided they wanted more computers, where would those computers be produced? Why? What do you think the PPF should look like as the U.S.–Mexico trade alliance initially moves away from point Z?

  4. Plot the point at which each country is completely specializing in the good for which it has the comparative advantage. Label this point B. Connect points A, B, and Z. This is the PPF for the U.S.–Mexico trade alliance. Can you describe how this PPF is a combination of the two nations’ separate PPFs?

  5. Suppose now that a third nation, Haiti, enters the trade alliance. In Haiti, the opportunity cost of a computer is 12 shirts, and Haiti has the labor necessary to produce 1 computer (or 12 shirts). Can you draw a new PPF for the U.S.–Mexico–Haiti trade alliance?

  6. Okay, what will happen to the PPF as more and more countries join the trade alliance? What would it look like with an infinite number of countries?

CHALLENGES

Question 2.17

1. In the computers and shirts example from the chapter, the United States traded one computer to Mexico in exchange for three shirts. This is not just an arbitrary ratio of shirts to computers, however. Let’s explore the terms of trade a little bit more.

  1. Why is trading away a computer for three shirts a good trade for the United States? Why is it also a good deal for Mexico?

  2. What if, instead, the agreed-upon terms of trade were one computer for eight shirts. Would this trade still benefit both the United States and Mexico?

  3. What is the maximum (and minimum) number of shirts that a computer can trade for if the United States and Mexico are both to benefit from the trade?

Question 2.18

http://qrs.ly/6q4arb1

2. Go to www.Ted.com and search for Thomas Thwaites’s talk, “How I Built a Toaster—from Scratch.” How much money and time do you think Thwaites spent building his toaster? How long do you think it would have taken Thwaites to earn enough money in, say, a minimum wage job to buy a toaster? Comment on the division of labor and the importance of specialization in increasing productivity.

!launch! WORK IT OUT

Here’s another specialization and exchange problem. This problem is wholly made-up, so that you won’t be able to use your intuition about the names of countries or the products to figure out the answer.

  1. Consider the following productivity table: Which country has an absolute advantage at making rotids? At making taurons?

     

    Number of Hours to Make One Rotid

    Number of Hours to Make One Tauron

    Mandovia

    50

    100

    Ducennia

    150

    200

  2. Using the information in the productivity table, estimate the opportunity cost of making rotids and taurons in Mandovia and Ducennia. Which country has a comparative advantage at manufacturing rotids? At making taurons?

     

    Opportunity Cost of Making One Rotid

    Opportunity Cost of Making One Tauron

    Mandovia

    ____ taurons

    ____ rotids

    Ducennia

    ____ taurons

    ____ rotids

    26

  3. One billion hours of labor are available for making products in Mandovia, and 2 billion hours of labor are available for making products in Ducennia. In a no-trade world, let’s assume that half the labor in each country gets used to make each product. (In a semester-long international trade course, you’d build a bigger model that would determine just how the workers are divided up according to the forces of supply and demand.) Fill in the table.

     

    Output of Rotids

    Output of Taurons

    Mandovia

     

     

    Ducennia

     

     

    Total output

     

     

  4. Now allow specialization. If each country completely specializes in the product in which it holds the comparative advantage, what will the total output of rotids be? Of taurons? Is the total output of each product higher than before?

     

    Output of Rotids

    Output of Taurons

    Mandovia

     

     

    Ducennia

     

     

    Total output

     

     

  5. Finally, let’s open up trade. Trade has to make both sides better off (or at least no worse off), and in this problem as in most negotiations, there’s more than one price that can do so (just think about haggling over the price of a car or a house). Let’s pick out a case that makes one side better off and leaves the other side just as well off as in a no-trade world. The price both sides agree to is three rotids for two taurons. Ship 5 million taurons in one direction, and 7.5 million rotids in the other direction (you’ll have to figure out on your own which way the trade flows). In the following table, calculate the amount that each country gets to consume. Which country is better off under this set of prices? Which one is exactly as well off as before?

     

    Output of Rotids

    Output of Taurons

    Mandovia

     

     

    Ducennia

     

     

    Total consumption

     

     

  6. This time, the trade negotiations turn out differently: It’s two rotids for one tauron. Have the correct country ship 10 million rotids, have the other send 5 million taurons, and fill out the table. One way to make sure you haven’t made a mistake is to make sure that “total consumption” is equal to “total output” from part d: We can’t create rotids and taurons out of thin air! Are both countries better off than if there were no trade? Which country likes this trade deal better than the deal from part e?

     

    Output of Rotids

    Output of Taurons

    Mandovia

     

     

    Ducennia

     

     

    Total consumption