Chapter 19: Q 9. (page 461)
Under what conditions does comparative advantage
lead to gains from trade?
The gains from trade are based only on comparative advantage.
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France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week.
a. Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.
b. Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes.
c. Identify which country has the comparative advantage.
d. How much would France have to give up in terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans?
Why might a low-income country put up barriers
to trade, such as tariffs on imports?
Does intra-industry trade contradict the theory of
comparative advantage?
What is absolute advantage? What is comparative advantage?
How can there be any economic gains for a country from both importing and exporting the same good, like cars?
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