Chapter
34 -3-6-7-12-13
This
is a guidance answer ... your actual answer during the exam should be longer
than this answer ...
3. Clearly,
apparel is produced with cheap labor, and we buy most of our apparel from
abroad because of the relatively high cost of labor in the United States. On
the other hand, aircraft are produced with highly skilled workers, and the
United States does enjoy a comparative advantage there. The United States does
not have as large an endowment of oil reserves as the rest of the world, yet we
are a big consumer. Both vehicles and food products are very heterogeneous.
Vehicles lend themselves to “acquired comparative advantage.” While the United
States has a lot of very fertile land for crop production, many things that we
consume are not suited for production: coffee, tea, dates, tropical fruits
(like bananas), and so forth. The table demonstrates the enormous complexity of
the pattern of international trade.
6. (a) The opportunity cost of a bottle of red wine
is 1.5 bottles of white in the United States and 2 bottles of white in
Australia. The United States, therefore, has a comparative advantage in red
wine. The opportunity cost of a bottle of white wine is .66 bottles of red in
the United States and .5 bottle of red in Australia. Australia, therefore, has
a comparative advantage in white wine.
(b) No, at the current exchange rate, both white
and red wine are cheaper in Australia. U.S. citizens will want to import both
types of wine from Australia, but Australians will not want to import U.S.
wine.
(c) In this situation, we would expect the price
of the dollar to decrease until U.S. red wine became attractive to Australians
whereas Australian white wine remained attractive to Americans. [An exchange
rate between 1.5 (calculated as 15 US$/10 AU$) and 2 (calculated as 10 US$/5
AU$) U.S. dollars to 1 Australian dollar would accomplish this.]
(d) In the long run, we would expect exchange
rates to adjust until Americans were exporting red wine to Australia and
Australians were exporting white wine to the United States.
7. Often
times, countries differentiate their products to please a wide variety of
tastes that exist worldwide. Just as some Americans may have a preference for
foreign-made shirts, some foreigners may have a preference for shirts produced
in America. The United States, which may not have a natural comparative
advantage in producing shirts, could have an acquired comparative advantage in
the production of specific kinds or styles of shirts. These differing global
tastes would explain why a country may import and export the same type of
product.
12. These
nations can still benefit by trading with each other. Even with an absolute
advantage in everything it produces, Pixley can not have a comparative
advantage in everything, and the basis of trade is made on comparative
advantage. Pixley will benefit if it chooses to only produce those goods which
can be produced at a lower cost relative to other goods. The same is true for
Hooterville. Even though Hooterville has an absolute disadvantage in everything
it produces, it will have a comparative advantage in at least one good.
13. While lower
exchange rates do make a nation’s exports more attractive, they also make a
nation’s imports more expensive. Consumers will end up paying a higher price
for all imports, reducing their buying power. With higher prices on imports,
consumers will purchase fewer, even when there is a comparative advantage in
production. Also, the exchange rate could drop so low that the currency becomes
virtually worthless. If this happened, other countries would be very hesitant
to accept this nation’s currency for payment of any goods or services.
Courtesy
of Case/Fair/Oster, 11th edition, 2014
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