Chapter 3 — Exercises

Section A — Computing comparative advantage

A1. Two friends, Maria and Jordan, can produce sweaters or scarves in an hour: - Maria: 6 sweaters or 12 scarves per hour - Jordan: 3 sweaters or 9 scarves per hour

(a) Who has an absolute advantage in sweaters? In scarves? (b) What is Maria's opportunity cost of one sweater (in scarves)? Of one scarf (in sweaters)? (c) What is Jordan's opportunity cost of one sweater? Of one scarf? (d) Who has a comparative advantage in sweaters? In scarves? (e) Pick a trading ratio that would make both parties better off. Justify your choice.

A2. Suppose Maria and Jordan each work 5 hours per day. If they don't specialize, each spends half their time on sweaters and half on scarves. Compute total daily output without specialization. Then compute total daily output if they each fully specialize in their comparative-advantage good. By how much did total output rise?

A3. Brazil and Argentina can each produce coffee or wheat. In one labor-hour, Brazil can produce 8 bags of coffee or 4 bushels of wheat. Argentina can produce 2 bags of coffee or 6 bushels of wheat. (a) Who has the absolute advantage in each good? (b) Who has the comparative advantage in each good? (c) Suppose they trade at a rate of 1 coffee for 1 wheat. Both should benefit. Why? (d) What is the range of trading ratios that would benefit both? What's the upper bound and the lower bound?

A4. Country A can produce 100 cars or 500 bushels of grain per worker per year. Country B can produce 30 cars or 300 bushels of grain per worker per year. (a) Who has the absolute advantage in cars? In grain? (b) Compute the opportunity costs. Who has the comparative advantage in cars? In grain? (c) Suppose each country has 100 workers. Compute total world output (cars + grain) if each country produces only its comparative-advantage good.

Section B — Conceptual

B1. Explain in your own words why a country with an absolute advantage in everything still gains from trade.

B2. "If we just made everything we needed in the United States, we'd have a stronger economy." Apply comparative advantage to evaluate this claim. Where does it have force, and where does it break down?

B3. Adam Smith's pin factory example showed that division of labor can increase output by orders of magnitude. Why does division of labor work? List the three reasons from §3.5 and give a modern example of each.

B4. "The reason China is so good at manufacturing is that they have lower wages." Use comparative advantage to refine or refute this claim. Is it the absolute level of wages that matters, or something else?

B5. Why might two regions in the same country (say, Iowa and Texas) still gain from trade with each other even though they're both part of the same currency, language, and legal system?

Section C — The Riverside Foods example

C1. §3.6 listed four ways the Riverside Foods plant illustrates comparative advantage. Pick one and explain it in your own words. Use the language of opportunity cost.

C2. Suppose Riverside Foods decided to start growing its own vegetables on company-owned farms. What would be the opportunity cost of this vertical integration? Under what conditions might it still be a good idea?

C3. Riverside Foods sells some of its product through grocery chains and some through direct food-service contracts (restaurants, schools, hospitals). Use comparative advantage to explain why the company doesn't sell only through grocery chains.

Section D — Trade and distribution

D1. The chapter's worked example with Anna and Ben showed that both gained from trade. Construct a different trade ratio (still between the two opportunity costs) where one of them gains more than the other. Show that both still benefit, but by different amounts.

D2. "Free trade increases total wealth, but the gains are unevenly distributed." Apply this claim to the case of U.S.–China trade in the 2000s. Who in each country gained? Who lost? (We'll come back to this in Chapter 9, but think about it now.)

D3. Suppose your country signs a free trade agreement with a poorer country. The total wealth of both countries rises. But within your country, some workers in import-competing industries lose their jobs. Should the trade agreement be passed? What does economic analysis tell you, and what does it leave for political and ethical judgment?

Section E — Personal application

E1. Identify a non-economic context in your own life where you have practiced specialization and trade. (Examples: a study group where each person tackles different chapters, a household where roommates divide chores by who's best at each, a class project where team members specialize.) Describe the comparative-advantage logic that made the arrangement work.

E2. Identify a context where you do not specialize even though you probably should. Why don't you? What's the cost of not specializing?

E3. A common piece of advice is "do everything yourself; outsourcing is wasteful." Apply comparative advantage to refute this. When would doing everything yourself be the right call?

Section F — Data lookup

F1. Go to the Observatory of Economic Complexity (oec.world) and look up the export profile of one country: Vietnam, Bangladesh, Brazil, Germany, or any other country of interest. What does the country specialize in? Does the specialization make sense in terms of comparative advantage?

F2. Find the U.S. import profile from China for a recent year. Identify three top categories of imports. Are these consistent with what you'd expect comparative advantage to predict?

Section G — Policy debate

G1. "Trade is good in theory, but in practice it has destroyed entire towns in the Midwest." Articulate the strongest case both for and against this claim. Which parts are positive and which are normative?

G2. "The U.S. should impose tariffs to protect domestic manufacturing." Articulate the strongest argument for this position (using the language of comparative advantage and its limits). Articulate the strongest argument against. Which side do you find more persuasive, and why?

Reflection questions

• Was the result that "trade benefits both parties even when one is better at everything" surprising to you when you first encountered it? Why or why not?
• Has reading this chapter changed how you think about international trade?
• In what sense is the modern global economy "built on comparative advantage"? Could it be built on something else?

Selected answers are in appendices/answers-to-selected.md.