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Question 1 of 6

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Assume Saudi Arabia and the United States face the production possibilities for oil and cars shown in the table.

Saudi Arabia United States
Quantity of oil
(millions of barrels)		 Quantity of cars
(millions)		 Quantity of oil
(millions of barrels)		 Quantity of cars
(millions)
0 4 0 10.0
200 3 100 7.5
400 2 200 5.0
600 1 300 2.5
800 0 400 0
Table

Calculate the following opportunity costs:

The opportunity cost of producing a car in Saudi Arabia is million barrels of oil.

The opportunity cost of producing a car in the United States is million barrels of oil.

The opportunity cost of producing a barrel of oil in Saudi Arabia is of a car (in decimal form). Round your answer to three decimal places.

The opportunity cost of producing a barrel of oil in the United States is of a car (in decimal form). Round your answer to three decimal places.

In Saudi Arabia 1 million cars can be produced by giving up production of 200 million barrels of oil. So the opportunity cost of 1 car in Saudi Arabia is 200 million barrels of oil.

The opportunity cost of producing 2.5 million cars in the United States is 100 million barrels of oil. So the opportunity cost of 1 car is equal to 100 million/2.5 million = 40 million barrels of oil.

The opportunity cost of producing 1 barrel of oil in Saudi Arabia is 0.005 of a car.

The opportunity cost of producing 1 barrel of oil in the United States is 0.025 of a car.

For review see section “Production Possibilities and Comparative Advantage, Revisited”
Calculate the following opportunity costs:
In Saudi Arabia 1 million cars can be produced by giving up production of 200 million barrels of oil. So the opportunity cost of 1 car in Saudi Arabia is 200 million barrels of oil.

The opportunity cost of producing 2.5 million cars in the United States is 100 million barrels of oil. So the opportunity cost of 1 car is equal to 100 million/2.5 million = 40 million barrels of oil.

The opportunity cost of producing 1 barrel of oil in Saudi Arabia is 0.005 of a car.

The opportunity cost of producing 1 barrel of oil in the United States is 0.025 of a car.

For review see section “Production Possibilities and Comparative Advantage, Revisited”
Calculate the following opportunity costs:
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      Which country (the United States or Saudi Arabia) has the comparative advantage in producing oil? In producing cars?
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          Suppose that in autarky, Saudi Arabia produces 200 million barrels of oil and 3 million cars; similarly, that the United States produces 300 million barrels of oil and 2.5 million cars.
          True or False: Without trade, both Saudi Arabia and the United State can only produce more oil if they produce fewer cars.
          In autarky, Saudi Arabia cannot produce both more oil and more cars. If Saudi Arabia produces 200 million barrels of oil and 3 million cars, it is on its production possibility frontier. This means that it can produce more oil only if it produces fewer cars. The same is true for the United States. For further review see section “Production Possibilities and Comparative Advantage, Revisited”.
          In autarky, Saudi Arabia cannot produce both more oil and more cars. If Saudi Arabia produces 200 million barrels of oil and 3 million cars, it is on its production possibility frontier. This means that it can produce more oil only if it produces fewer cars. The same is true for the United States. For further review see section “Production Possibilities and Comparative Advantage, Revisited”.
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              Now suppose now that the United States and Saudi Arabia specialize in producing the good for which it has the comparative advantage, and the two countries trade. Also assume that for each country the value of imports must equal the value of exports.Calculate the following:

              What is the total quantity of oil produced by both countries?

              million barrels of oil

              What is the total quantity of cars produced by both countries?

              million cars

              If each country specializes, Saudi Arabia will produce 800 million barrels of oil 0 cars and the United States will produce 10 million cars 0 barrels of oil. For further review see section “The Gains from International Trade”.
              What is the total quantity of oil produced by both countries? What is the total quantity of cars produced by both countries?
              If each country specializes, Saudi Arabia will produce 800 million barrels of oil 0 cars and the United States will produce 10 million cars 0 barrels of oil. For further review see section “The Gains from International Trade”.
              What is the total quantity of oil produced by both countries? What is the total quantity of cars produced by both countries?
              WIO_Krugman_Chapter08_04
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                  True or False: It is possible for both Saudi Arabia and the United States to consume 400 million barrels of oil and 5 million cars?

                  True, it is possible for both Saudi Arabia and the United States to consume 400 million barrels of oil (for a total of 800 million barrels). And it is possible for both countries to consume 5 million cars and for the United States to consume 5 million cars (for a total of 10 million cars). For further review see section “The Gains from International Trade”.
                  True or False: It is possible for both Saudi Arabia and the United States to consume 400 million barrels of oil and 5 million cars?
                  True, it is possible for both Saudi Arabia and the United States to consume 400 million barrels of oil (for a total of 800 million barrels). And it is possible for both countries to consume 5 million cars and for the United States to consume 5 million cars (for a total of 10 million cars). For further review see section “The Gains from International Trade”.
                  True or False: It is possible for both Saudi Arabia and the United States to consume 400 million barrels of oil and 5 million cars?
                  WIO_Krugman_Chapter08_05
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                      Suppose that, in fact, Saudi Arabia consumes 300 million barrels of oil and 4 million cars and the United States consumes 500 million barrels of oil and 6 million cars.

                      How many barrels of oil does the United States import?

                      million barrels

                      How many cars does the United States export?

                      million cars

                      Suppose a car costs $10,000 on the world market. How much, then, does a barrel of oil cost on the world market?

                      $

                      Since the United States does not produce oil they must have imported 500 million barrels of oil from Saudi Arabia. Since Saudi Arabia does not produce cars they must have imported 4 million cars from the United States. That is the United States and Saudi Arabia exchange 4 million cars and 500 million barrels of oil. Which implies each car trades for 125 barrels of oil (500 million barrels /4 million = 125). If a car costs $10,000 on the world market, then a barrel of oil costs $80 ($10,000/125 = $80).For further review see section “The Gains from International Trade”.
                      How many barrels of oil does the United States import? How many cars does the United States export? Suppose a car costs $10,000 on the world market. How much, then, does a barrel of oil cost on the world market?
                      Since the United States does not produce oil they must have imported 500 million barrels of oil from Saudi Arabia. Since Saudi Arabia does not produce cars they must have imported 4 million cars from the United States. That is the United States and Saudi Arabia exchange 4 million cars and 500 million barrels of oil. Which implies each car trades for 125 barrels of oil (500 million barrels /4 million = 125). If a car costs $10,000 on the world market, then a barrel of oil costs $80 ($10,000/125 = $80).For further review see section “The Gains from International Trade”.
                      How many barrels of oil does the United States import? How many cars does the United States export? Suppose a car costs $10,000 on the world market. How much, then, does a barrel of oil cost on the world market?
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