2023 AP Microeconomics FRQ Set 2 #2 (Comparative Advantage & Terms of Trade)

 2023 AP Microeconomics FRQ Set 2 #2 (Comparative Advantage & Terms of Trade)

First think about the steps of comparative advantage questions

1. Is it an output or input problem?

The PPC’s of each country show the amount of each good that can be produced.

Production of goods = output problem

2. Identify absolute advantage

Absolute advantage for an output problem is which country can produce the most

They both can produce 100 wheat – so no one has an absolute advantage for wheat

South can produce 50 cloth while North can produce 300 cloth

North has absolute advantage in cloth as it can produce more.

3. Comparative Advantage: Draw a table – do the math.

Answered Below

4. Check answer using quick method

Answered Below

A) Which country has a comparative advantage in producing wheat? Explain using numbers.

 

Set up your table Step #3

I like countries or people on the left and goods on the top

An output problem so the math is over

Output = Over

Look at Southland first, the 50 goes over the 100 & the 100 goes over the 50

Then do

Northland, the 300 goes over the 100 and the 100 goes over the 300

Your table should look like this, but better :0

Do the math & explain 

Southland

Southland 50/100 = .5

The .5 is the opportunity cost of producing 1 bushel of wheat for Southland

Let’s say it a bit differently – for every 1 bushel of  wheat produced 

Southland gives up .5 cloth

Let’s look on the cloth side for Southland

Southland 100/50 = 2

The 2 is the opportunity cost of producing 1 cloth for Southland

For every 1 cloth produced Southland gives up 2 bushels of wheat

To find comparative advantage we need to do the math for both countries and compare

Northland

Northland 300/100 = 3

Know how to read the table correctly – 

For every 1 bushel of wheat produced Northland gives up 3 cloth

Northland 100/300 = .33

For every 1 cloth produced Northland gives up .33 bushels of wheat

We then want to compare the opportunity costs in the columns for Wheat

The country with the lowest opportunity cost for wheat should produce wheat.

For every 1 wheat produced Southland gives up .5 cloth

For every 1 wheat produced Northland gives up 3 cloth

.5 is the lowest opportunity cost for wheat so Southland should produce/export wheat

 

Let’s look in the column for Cloth and compare

The country with the lowest opportunity cost for cloth should produce cloth.

For every 1 cloth produced Southland gives up 2 wheat

For every 1 cloth produced Northland gives up .33 wheat

.33 is the lowest opportunity cost for cloth so Northland should produce/export cloth

 

With comparative advantage each country should produce one of the goods

You will never have a situation where 1 country will produce both goods

That was a lot of work

Let’s say it again & explain using Numbers

Southland has a comparative advantage in wheat as it has the lowest opportunity cost.

Southland gives up .5 cloth for 1 wheat while Northland gives up 3 cloth for 1 wheat.

Southland should produce/export wheat as it has the lowest opportunity cost.

 

Northland has a comparative advantage in cloth as it has the lowest opportunity cost

Northland gives up .33 wheat for 1 cloth and Southland gives up 2 wheat for 1 cloth

Northland should produce/export cloth as it has the lowest opportunity cost.

 

((Southland should produce wheat & Northland should produce cloth))

 

Step 4. Check answers using quick method.

First cross multiply

 As 100 x 300 = 30,000 The 30,000 is larger than 5,000

We use the two numbers that gave us the 30,000 

and those two numbers show who should produce.

((Southland should produce wheat & Northland should produce cloth))

We have done something right as the slow and the fast method both gave us the same answers

 

B) Identify a specific number of yards of cloth that could be traded for 10 bushels of wheat and would be beneficial to North & South.

First let’s find the mutually beneficial terms of trade for 1 wheat,

If we are looking for what would be could be traded for 10 wheat, we just need to multiply the opportunity costs by 10 and then pick a number between the two opportunity costs.

.5 x 10 = 5

&

3 x 10 = 30

Mutually beneficial terms of trade is a number between 5 & 30

10 wheat for 15 cloth would work

Or 

10 wheat for 20 cloth would work

For 10 wheat Southland (the producer of wheat) needs to get more than 5 and Northland (the consumer of wheat) needs to give up less than 30

For 10 wheat a number of cloth between 5 & 30 would be mutually beneficial

 

C) Southland’s maximum possible output of wheat from 100 bushels to 75 bushels. Assuming no other changes, will Southland have a comparative advantage in producing cloth? Explain using numbers.

Southland’s production of wheat falls to 75 bushels.

It is still an output problem and the math is over

50/75 = .66

75/50 = 1.5

We look in the columns and notice that Southland should still produce wheat as it has the lowest opportunity cost and Northland should produce cloth

 

Explain using the numbers for cloth.

Northland should produce cloth as for every 1 cloth produced Southland gives up 1.5 wheat 

And Northland for every 1 cloth produced gives up .33 wheat, as Northland gives up the least wheat “has the lowest opportunity cost” it should produce cloth.

D) Turnips are produced in a perfectly competitive market in Alderia, a third country, which does not engage in international trade. Runoff from turnip fields pollutes Alderia’s rivers hurting its citizens.

 

(i)  Does the turnip market equilibrium result in an efficient allocation of resources? Explain using marginal analysis.

 

Pollution implies our analysis should be graphed using the production of turnips 

as a negative production externality.

Explain using marginal analysis.

There is a negative production externality as the marginal social cost of producing turnips is greater than the marginal personal cost causing harm to citizens due to the runoff pollution. The allocatively efficient quantity of production should be where the marginal social benefit of consumption of turnips equals the marginal social cost of producing turnips. There is market failure as the market is not producing at the allocatively efficient quantity.

(ii) In an effort to reduce pollution Alderia’s government imposes a lump-sum tax on turnip production. What will be the impact on the turnip market equilibrium price and quantity in the short-run?

 

Lump sum taxes do not affect the marginal cost of the companies and therefore do not change the price or the quantity of production in the short-run.

 

If the government had wanted to reduce the production of turnips, they should have imposed a per-unit tax. As per-unit tax is treated like variable costs in that they shift the marginal cost curve leftward reducing the amount of the good produced.

Comparative Advantage (Input) Problem 1995 Step by Step

 Comparative Advantage (Input) Problem 1995

1.     Determine  - if it an Output or Input problem?

2.     Draw a Graph/PPC  - of the problem.

3.     Recognize  - who has Absolute Advantage?

4.     Compute  - Comparative Advantage?

5.     Redraw the Table  - (if needed) with people/countries on the left and goods on the top.

6.     Do the math - Input problem so the math is (Under).

7.     Find/ Mark/Bubble in the right answer.

8.     Dirty quick method - Cross Multiply after arranging the Table correctly and find the smaller number.

9.     Go back and check  - to make sure you did everything right

 

1995

1.     Determine  - if it an Output or Input problem?

Input questions have (1 unit of X) as what is produced, that can be (1 ton of wheat) or (one pair of shoes) or in this instance (1 unit of food) or (1 unit of clothing)

 

What are variable are the resources used in producing the (1 unit of food) .

 

Output problems  - inputs/resources used in production of the good are (fixed/equal resources) the amount actually produced is (variable)

 

Input problems – inputs/resources used in production of the good is (variable) the amount actually produced is (fixed).

Lets say it a different way.

 

In the above question – Country X used 20 resources to produce (1 unit of food) while Country Y used 10 resources to produce (1 unit of food).

 

The resources used to produce are (different/variable) while what is produced is fixed (1 unit of food) so this is an Input Problem.

Lets say it a different way.

If what goes in is variable it's an Input problem

If what comes out is variable it's an Output problem

2.     Draw a Graph/PPC  - of the problem.

3.     Recognize  - who has Absolute Advantage?

As it is an input problem Country Y is the most efficient and has absolute advantage in producing both Food and Clothing.

 

Lets say it as simply as possible:

If it’s an Output problem who ever produces the most has absolute advantage but if it’s an input problem who ever produces using the least resources has absolute advantage.

In this Input problem Country Y has absolute advantage in food and clothing as it can produce both goods using the least amount of resources.

4.     Compute  - Comparative Advantage?

 

It's an Input problem so Input problems the math is Under

after moving the numbers under you need to divide.

Then look in the columns and recognise whoever has the lowest opportunity cost

is who should produce the good as they can produce it with the lowest

amount of resources used.

7. Find/ Mark/Bubble in the right answer.

8.     Dirty quick method - Cross Multiply after arranging the Table correctly and find the smaller number for an Input problem.

9.     Go back and check  - to make sure you did everything right

Comparative Advantage Output Problem (1990) Step by Step

 Comparative Advantage Output Problem (1990)

1.     Is it an Output or Input problem? (This is always the first question!)

How do we know this is an Output problem, the amount of production (output) is variable based on the productive ability between England & Portugal, while the resources that go into the production of the goods are fixed (unit of labor input).

Output problems  - inputs/resources used in production of the good are (fixed/equal resources) the amount actually produced is (variable)

Input problems – inputs/resources used in production of the good is (variable) the amount actually produced is (fixed).

Lets say it a different way

Portugal using 1 unit of labor can produce 24 cloths while England using 1 unit of labor can produce 20 cloths respectively.

Both are using equal resources (1 unit of labor input) to produce but the Production or output of cloth is variable (England 20 compared to Portugal of 24).

Lets say it a different way

If what goes in is variable it's an Input problem

If what comes out is variable it's an Output problem

2.     Draw a Graph/PPC of the problem.

Notice that since it is an Output problem Portugal can produce more of both goods compared to England.

3.     Who has Absolute Advantage?

In this Output problem Portugal has an Absolute advantage in the production of both goods as it can produce more in comparison with England using equal resources. 

4.     Who has a comparative advantage?

5.     Redraw the table (if needed) with people/countries on the left and goods on the top.

6.     It’s an Output problem so the math is OVER.

It's an Output problem so in Output problems the math is Over

after moving the numbers over you need to divide.

Then look in the columns and recognise whoever has the lowest opportunity cost

is who should produce the good as they can produce it with the lowest

amount of resources used.

7. Find/ Mark/Bubble in the right answer.

Super quick way to find 

Comparative Advantage for Output Problems

 

8.     Cross Multiply after arranging the Table correctly and find the larger number.

9. Go back and check to make sure you did everything right

Journey to thank a thousand people for a morning cup of Joe.

Ted Talk

Author AJ Jacobs embarked on a quest with a deceptively simple idea at its heart: to personally thank every person who helped make his morning cup of coffee. More than one thousand "thank yous" later, Jacobs reflects on the globe-trotting journey that ensued -- and shares the life-altering wisdom he picked up along the way. "I discovered that my coffee would not be possible without hundreds of people I take for granted," Jacobs says.

Specialization
Comparative Advantage
Division of Labor
Invisible Hand

MR University

A simple example of hamburgers being made at home versus at a restaurant can help illuminate the explosion of prosperity since the Industrial Revolution. The story of the division of labor and development of specialized tools is not a new one — Adam Smith began The Wealth of Nations with this concept. Yet it still has tremendous explanatory power about the world we inhabit.

Comparative Advantage - Podcast

https://www.npr.org/transcripts/517076055

Every spring convoys of trucks arrive in the almond orchards of central California. They are carrying bees. Millions of them.

They arrive from all over the country, but especially southern states like Louisiana, and they have to get there at just the right time, when the almond trees start to flower so the bees can pollinate hundreds of acres of almond fields.

But why make the 2,000 mile trek from the South instead of raising bees right in the Central Valley? It comes down to comparative advantage. Louisiana has better conditions for bees. It's warm, green and there are plenty of flowers for the bees. And California has the edge in almond growing.

The journey has it's own set of challenges. Not least of which is, you can't stop during the day or the bees try to escape.

Today on the show, how bees keep our produce sections stocked with fruit.

2018 AP Macroeconomics FRQ #3

2018 AP Macroeconomics FRQ #3

2008 Macro Multiple Choice (Comparative Advantage & TOT)

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.

Terms of Trade (Absolute & Comparative Advantage)

Terms of Trade (Macro)

(Absolute & Comparative Advantage)

(This is an output problem therefore cross multiply (Over).

(A) Who has the absolute advantage  in producing donuts? Explain.

If we look at the chart above we see that John can produce 200 donuts and Erica can produce 150. Therefore John has an absolute advantage in the production of donuts.

(B) Who has the comparative advantage in producing donuts? Explain.

John can either produce 200 donuts or 100 cupcakes. If he makes 200 donuts he gives up 100 cupcakes (100/200 = .5 or 1/2). Said in a different way, for every donut John makes he gives up 1/2 of a cupcake or for every cupcake he makes he gives up 2 donuts. (200/100 = 2)

Erica, on the other hand, can either make 150 donuts or 50 cupcakes. If she makes 150 donuts she gives up 50 cupcakes (50/150 = .333... or 1/3). Said in a different way, for every donut Erica makes she gives up a 1/3 of a cupcake or for every cupcake she makes she gives up 3 donuts.  (150/50 = 3)

As Erica's opportunity cost of producing 1 donut is 1/3 of a cupcake, which is less than John's opportunity cost which is 1/2 of a cupcake for every donut he makes. 

Erica gives up less cupcakes by producing donuts than John does. She is more efficient.

Remember that comparative advantage is about who gives up less than the other person, as lower opportunity cost is the key.

(C) Assume that John and Erica decide to specialise according to their comparative advantages and that one cupcake is exchanged for four donuts.

If John and Erica specialise then Erica would make the donuts and John would make cupcakes. 

(i) Indicate wether or not specialisation and trade would be beneficial to John.

Before specialisation John could make a cupcake or two donuts,  said another way, if John makes two donuts he gives up a cupcake. After trade and specialisation John can trade a cupcake for 4 donuts. He would be better off.

(ii) Indicate wether or not specialisation and trade would be beneficial to Erica.

Before specialisation Erica could make a donut and give up 1/3 of a cupcake. Said another way, Erica could make a cupcake and give up 3 donuts. After trade and specialisation Erica would have to give up 4 donuts for 1 cupcake. This would not be beneficial for Erica.

(D) Assume that Erica discovers a new cupcake production technique that will increase her daily production of cupcakes only. Using donuts on the horizontal axis, draw a correctly labeled  production possibility curve for Erica, before and after the technology change in cupcake production.

Understand, that Erica's production of donuts will not increase but her ability to produce more cupcakes with the same resources will increase.

(Equal Amounts of Resources = Output/Over Problem)

(If they give you a graph draw a chart, if you get a chart draw a graph)

Make a chart and cross multiply (over)

(A) Calculate the opportunity cost of a bicycle in Artland.

Look at the chart - Understand that you only make two goods, so your opportunity cost is what you give up of the other good. In this instance the opportunity cost of a bicycle is how many hats you give up for one bicycle.

Art land gives up 2 hats for 1 bicycle.

(B) If the two countries specialise and trade which country will import bicycles. Explain.

OK, so this is the college board trying to be very tricky. 

If Art should produce Bicycles as it only gives up 2 hats for each bicycle it makes then Art should produce Bicycles and import hats.

Since, Ray will produce hats as its opportunity cost is lowest for bicycles, it will import bicycles.

(C) If the term of trade are 5 hats for 1 bicycle, would trade be advantage for

 (i) Artland

(ii) Rayland

Understand what is happening - Artland is making bicycles and Rayland is making hats, if the terms of trade are 5 hats for 1 bicycle and Artland is making bicycles then they would give up one bike and get 5 hats. Pretty Good!!! - - - But, Rayland is making hats and the terms are trade are 5 hats for 1 bicycle - right now Rayland can give up 4 hats to get a bicycle. If they accept these terms of trade they will be giving up 1 extra hat for a bicycle.

(D) If production in Artland triples, which country has the comparative advantage in hats?

If the production capabilities triple in one country for both goods then the ratios remain the same

300/1200 = .25 or

900/3600 = .25

(Using Equal Amounts of Resources = Output/Over Problem)

Take a moment to see what is going on.
The coloured circles show who has the lowest opportunity cost in that column.

Understand that the opportunity cost of having something is the good being given up.

So, to have 1 unit of cloth an amount of food must be given up

to have 1 unit of food an amount of good must be given up

(A) 

(i) Calculate the opportunity cost of producing a unit of cloth in Newland.

Understand that the opportunity cost of 1 unit of cloth is the mount of food that must be given up.

2/10 = .2 or 20% or 1/5

In essence, Newline must give up producing 1/5 of a unit of food to produce 1 unit of cloth

(ii) Calculate the opportunity cost of producing a unit of food in Beeline.

1/10 = .1 or 10% or 1/10

Beeline, to produce 1 unit of food must give up 10 units of cloth.

(B) 

(i) Which nation has the comparative advantage in cloth production.

Do the cross multiplying (over) and then evaluate in the cloth column who has the lowest opportunity cost. In essence, who will give up less resources in producing this good.

Beeland only gives up .1 or 1/10th of a unit of food to create (1) unit of cloth

(ii) Which nation has the comparative advantage in food production.

Cross multiply, and then look at the food column and see who has the lowest opportunity cost. Who can produce a unit of food and give up the least resources.

Newland,  only gives up (5) units of cloth to produce (1) unit of food.

(C) Now assume that the productivity of Beeland's workers triple (for each good).

(i) Which country has the comparative advantage in food production? (ii) Explain.

(Have Equal Amounts of Resources = Output/over)

(IF they give you a graph, make a chart)

(A) Which country has an absolute advantage in the production of tractors? Explain.

You must know what an absolute advantage is...

Since, using the same amount of resources tells us that this is an output problem 

(inputs are fixed and the output is variable)

Each country uses the same resources, who produces more has absolute advantage

Tractors - Xanadu using the same resources has an output (production) of 40 > 10

(B) Which country has a comparative advantage in the production of cars? Using the concept of opportunity cost. Explain.

(To get comparative advantage you must compare, do the math)

(C) If the two countries specialise and trade with each other, which country will import cars? Explain.

Understand, that if Atlantis has the comparative advantage in producing cars so it will produce cars domestically.

Xanadu has the comparative advantage in producing tractors, so it will produce tractors and import cars.

(D) If the terms of trade are one car for one tractor, explain how Atlantis will benefit.

I'm Atlantis and I have 3 cars but I want a tractor. Jed comes up to me and says he has a tractor to sell but its gonna cost me 3 cars. Now Jung Sub shows up and he has a tractor to sell me and he only wants 1 car. By trading with Jung Sub instead of Jed I've gained/not lost 2 cars.

I'm Xanadu, I have tractors and I want to purchase a car. Chris offers to sell me a car but she wants 2 tractors. (Don't be a bitch Chris!) Instead, Jamie comes along and offers me a car for only 1 tractor. I win and save myself the cost of 1 tractor by trading with Jamie.

(Using Equal Amounts of Resources = Output/over)

(A) Which country has an absolute advantage in the production of machines? Explain.

Look at the graph, using equal resources Luna can produce 40 machines to Ashna's 10. (40>10)

 (B) Which country has an absolute advantage in the production of food? Explain.

Look at the graph, using equal resources, Luna can produce 40 units of food to Ashna's 30.

(C) Which country has a comparative advantage in the production of machines? Explain.

To find comparative advantage you must compare, do the math with a chart.

(D) With trade between these two countries which will import food. Explain.

Looking at the chart we see that Luna has the lowest opportunity cost in making machines and therefore should make machines. Therefore if Luna is making machines they must be importing food.

(Understand that turning this around might be closer to what they want but I'd be willing to bet they would accept any explanation as long as it is correct.)

(E) Give an example of a terms of trade acceptable to both countries.