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Question 1 of 7

Work It Out
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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.

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

has the absolute advantage in producing rotids and has the absolute advantage in producing taurons.

Correct! Mandovia can produce 1 rotid in 50 hours but it would take Ducennia 150 hours, so Mandovia can make a rotid using fewer resources. Likewise, Mandovia could also make one tauron using fewer resources than Ducennia.
Sorry, please make sure you consider how long it takes each country to make 1 rotid or 1 tauron. Remember, absolute advantage is the ability to produce the same good using fewer inputs than another producer. To review how to determine absolute advantage, please see the section “Comparative Advantage.”

Using the information in the productivity table, estimate the opportunity cost of making rotids and taurons in Mandovia and Ducennia. Which of the following choices best reflects the associated opportunity costs?
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      Based on your relative opportunity cost calculations, Mandovia has the comparative advantage in producing and Ducennia has the comparative advantage in making .

      Correct! Mandovia’s opportunity cost of producing 1 rotid is 1/2 of a tauron while in Ducennia the opportunity cost of 1 rotid is 3/4 of a tauron. Likewise, Mandovia’s opportunity cost of producing 1 tauron is 2 rotids, while in Ducennia the opportunity cost of 1 tauron is 4/3 rotids.
      Sorry, please make sure you thinking about comparative advantage and not absolute advantage. Remember, comparative advantage is the ability to produce at a lower opportunity cost compared to another producer. To review how to determine absolute advantage, please see the section “Comparative Advantage.”

      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 is 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 a value for each letter in the table by completing the following statements. Enter 1,000,000 as 1; 2,300,000 as 2.3, and so on. Round numbers to one decimal place.

      Output of Rotids Output of Taurons
      Mandovia
      Ducennia
      Total output
      Table
      Sorry! Think about how much each country can produce by itself given the amount of resources they own. If Mandovia equally splits 1 billion hours between the two products, then how much of each would it produce given how long it takes to produce 1 unit of each? To review how to calculate overall production, please see the section “Comparative Advantage.”
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          Now allow specialization. If each country completely specializes in the product for which it holds the comparative advantage, total output of rotids would be and total output of taurons would be . Enter 1,000,000 as 1; 2,300,000 as 2.3, and so on, rounding to one decimal place. The total output of each product is than before.

          Sorry! Think about how much each country can produce by itself given the amount of resources they own. If Mandovia has 1 billion hours to use, then how much could it produce of the product in which it has a comparative advantage? To review how to calculate overall production under complete specialization, please see the section “Comparative Advantage.”

          Finally, let’s open up trade. Trade has to make both sides better off to occur (or at least no worse off), and in this problem, as in most negotiations, there is more than one price that can make both sides better off (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 3 rotids for 2 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?

          Fill in a value for each letter in the table by completing the following statements. Round numbers to one decimal place where necessary.

          Mandovia would consume A = million rotids and B = million taurons while Ducennia would consume C = million rotids and D = million taurons. Mandovia is , while Ducennia is under these prices.



          Correct! Mandovia will consume 12.5 million rotids after giving Ducennia 7.5 million rotids. Ducennia will consume 15 million taurons after giving Mandovia 5 million taurons. Ducennia can make 0 rotids and 2,000,000,000 / 200 = 20 million taurons under complete specialization. Together, with trade, they can consume 20 million rotids and 20 million taurons. Both countries are better off than before but Ducennia gains more at these prices.
          Sorry! Think about how much each country has left after it gives the required amount of the product that they produce to the other country. To review how to calculate overall production under complete specialization, please see the section “Comparative Advantage.”
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              This time, the trade negotiations turn out differently: It’s 2 rotids for 1 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 the “total output” from Question 4 of 7. 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 Question 6?

              Fill in a value for each letter in the table by completing the following statements.

              Mandovia would consume A = million rotids and B = million taurons while Ducennia would consume C = million rotids and D = million taurons. Mandovia is while Ducennia under these prices.



              Correct! Mandovia will consume 10 million rotids after giving Ducennia 10 million rotids. Ducennia will consume 15 million taurons after giving Mandovia 5 million taurons. Together, with trade, they can consume 20 million rotids and 20 million taurons. Mandovia consumes that same amount as before trade but Ducennia gains at these prices compared to the prices in Question 6.
              Sorry! Think about how much each country has left after it gives the required amount of the product that they produce to the other country. To review how to calculate overall production under complete specialization, please see the section “Comparative Advantage.”