Check Your Understanding

1. Question

   In Italy, an automobile can be produced by 8 workers in one day and a washing machine by 3 workers in one day. In the United States, an automobile can be produced by 6 workers in one day, and a washing machine by 2 workers in one day.

   1. Which country has an absolute advantage in the production of automobiles? In washing machines?

      The United States has an absolute advantage in automobile production because it takes fewer workers (6) to produce a car in one day than it takes in Italy (8). The United States also has an absolute advantage in washing machine production because it takes fewer workers (2) to produce a washing machine in one day than it takes in Italy (3).

   2. Which country has a comparative advantage in the production of washing machines? In automobiles?

      Creating a table with the data will help students as they tackle this question. In Italy, the opportunity cost of a washing machine in terms of an automobile is 3/8. In other words, 3/8 of a car can be produced with the same number of workers and in the same time it takes to produce 1 washing machine. In the United States, the opportunity cost of a washing machine in terms of an automobile is 2/6 = 1/3. In other words, 1/3 of a car can be produced with the same number of workers and in the same time it takes to produce 1 washing machine. Since 1/3 < 3/8, the United States has a comparative advantage in the production of washing machines: to produce a washing machine, only 1/3 of a car must be given up in the United States but 3/8 of a car must be given up in Italy. This means that Italy has a comparative advantage in automobiles, which can be checked as follows. The opportunity cost of an automobile in terms of a washing machine in Italy is 8/3, equal to 2⅔. In other words, 2⅔ washing machines can be produced with the same number of workers and in the time it takes to produce 1 car in Italy. And the opportunity cost of an automobile in terms of a washing machine in the United States is 6/2, equal to 3. In other words, 3 washing machines can be produced with the same number of workers and in the time it takes to produce 1 car in the United States. Since 2⅔ is less than 3, Italy has a comparative advantage in automobiles.

      Number of workers
      	Italy	United States
      Car	8	6
      Washing Machine	6	2

   3. What type of specialization results in the greatest gains from trade between the two countries?

      The greatest gains are realized when each country specializes in producing the good for which it has a comparative advantage. Therefore, based on this example, the United States should specialize in washing machines and Italy should specialize in automobiles.

2. Question

   Refer to the story of Tom and Hank illustrated by Figure 4.1 in the text. Explain why Tom and Hank are willing to engage in a trade of 1 fish for 1½ coconuts.

   In a trade of 1 fish for 1½ coconuts, Hank gives up less for a fish than he would if he were producing fish himself—that is, he gives up less than 2 coconuts for 1 fish. Likewise, Tom gives up less for a coconut than he would if he were producing coconuts himself—with trade, a coconut costs ⅔ of a fish, less than the 4/3 of a fish he must give up if he does not trade.