2008 Macro Multiple Choice (Comparative Advantage & TOT)
(If you are given a graph, Make a Chart. If given a chart make a graph.)
A has an absolute advantage in both grain and steel as it can produce more of both using available resources. (look at the graph or the chart)
1st - Is this an output or an input problem.
From the Cheat sheet here.
Producing two goods, using all of their available resources.
This implies to me,, that this is an output problem as the inputs used are not specified while the outputs are specific.
Output problem cross-multiply
over = output
output = over
Look in the columns (Grain) & (Steel) and find the lowest opportunity cost & circle it.
A has the lowest opportunity cost in Grain as 1<2
B has the lowest opportunity cost in Steel as .5<1
Answer - (A)
Alpha should produce (export) grain as they have the lowest opportunity cost in the production of grain and trade (import) steel.
B should produce (export) steel as they have the lowest opportunity cost in the production of steel and trade (import) grain.
It is very important that you know how to read the chart after you have found the opportunity cost!!!!
Answer - B
A (gives up) 1G for 1S
B (gives up) 1G for 2S
Answer - (B)
Graph the chart of opportunity costs.
Understand that the countries will accept a terms of trade if the trade is below their opportunity cost (what they can make it themselves)
Really you need to just recognise that if you have graphed the opportunity costs correctly that the countries will accept anything between their respective curves.