Chapter . 15 Macro/16 Micro (26 Econ)

Incorrect! Recall that opportunity cost is the amount given up to get one more. India’s opportunity cost for 1 million tons of tea is 4/60 = 1/15 ≈ .07 tons of olives, while India’s opportunity cost for 1 million tons of olives is 15 million tons of tea. (Notice that these numbers are just reciprocals of each other.) Italy’s opportunity cost for 1 million tons of tea is 12/20 = 3/5 = 0.6 tons of olives, while Italy’s opportunity cost for 1 million tons of olives is 1.6 million tons of tea. Since India’s opportunity cost for tea is lower, India will specialize in tea. Similarly, since Italy’s opportunity cost for olives is lower, Italy will specialize in olive production. One country has a comparative advantage in producing some good if its opportunity cost to produce that good is lower than the other country’s. Countries should specialize in producing the good in which they have a comparative advantage. India’s opportunity cost for tea is lower, therefore India should specialize in tea production. Likewise, Italy’s opportunity cost for olives is lower and thus Italy should specialize in olive production. Also note that in this case the two countries split the absolute advantages. In particular, Italy has the absolute advantage in olive production, while India has the absolute advantage in tea production. Therefore, the comparative advantages follow: Italy has the comparative advantage in olive production, while India has the comparative advantage in tea production. Even if one country has the absolute advantage in the production of both products, as long as the opportunity costs are different, the countries can still specialize and gain from trade. For further review, see section “Absolute and Comparative Advantage."

Correct! Recall that opportunity cost is the amount given up to get one more. India’s opportunity cost for 1 million tons of tea is 4/60 = 1/15 ≈ .07 tons of olives, while India’s opportunity cost for 1 million tons of olives is 15 million tons of tea. (Notice that these numbers are just reciprocals of each other.) Italy’s opportunity cost for 1 million tons of tea is 12/20 = 3/5 = 0.6 tons of olives, while Italy’s opportunity cost for 1 million tons of olives is 1.6 million tons of tea. Since India’s opportunity cost for tea is lower, India will specialize in tea. Similarly, since Italy’s opportunity cost for olives is lower, Italy will specialize in olive production. One country has a comparative advantage in producing some good if its opportunity cost to produce that good is lower than the other country’s. Countries should specialize in producing the good in which they have a comparative advantage. India’s opportunity cost for tea is lower, therefore India should specialize in tea production. Likewise, Italy’s opportunity cost for olives is lower and thus Italy should specialize in olive production. Also note that in this case the two countries split the absolute advantages. In particular, Italy has the absolute advantage in olive production, while India has the absolute advantage in tea production. Therefore, the comparative advantages follow: Italy has the comparative advantage in olive production, while India has the comparative advantage in tea production. Even if one country has the absolute advantage in the production of both products, as long as the opportunity costs are different, the countries can still specialize and gain from trade. For further review, see section “Absolute and Comparative Advantage."

Incorrect! If Italy specializes in producing olives, it can produce 12 million tons, which would be split evenly between the two countries. If India specializes in producing tea, it can produce 60 million tons, which would be split between the two countries.

Correct! If Italy specializes in producing olives, it can produce 12 million tons, which would be split evenly between the two countries. If India specializes in producing tea, it can produce 60 million tons, which would be split between the two countries.

Incorrect! Originally, Italy consumed 6 million tons of olives and 10 million tons of tea, while India consumed 2 million tons of olives and 30 million tons of tea. After trade, each country consumes 6 million tons of olives and 30 million tons of tea. The new combination is outside each country’s PPF, so each country is better off with trade.
For further review, see section “Absolute and Comparative Advantage”.

Correct! Originally, Italy consumed 6 million tons of olives and 10 million tons of tea, while India consumed 2 million tons of olives and 30 million tons of tea. After trade, each country consumes 6 million tons of olives and 30 million tons of tea. The new combination is outside each country’s PPF, so each country is better off with trade.
For further review, see section “Absolute and Comparative Advantage”.