Practise calculating absolute and comparative advantage, tracing gains from specialisation and free trade and interpreting terms-of-trade changes and their limitations.
The table shows different combinations of rings and bracelets that can be produced by Luke and Zoe in the same time period.
Which statement is not correct?
Luke has a larger opportunity cost than Zoe for making bracelets.
The opportunity cost of producing rings is constant for both Luke and Zoe.
Zoe should specialise in making rings.
Zoe's opportunity cost for each bracelet is 2 rings.
Countries X and Y both produce goods M and N . They decide to specialise and trade freely in the goods.
Under which conditions are the gains from specialisation and free trade likely to be smallest?
mobility of factors of
production between
goods M and N
mobility of factors of
production between
countries X and Y
high
high
high
low
low
high
low
low
Country X has a comparative advantage in producing wheat and country Y in producing cars. However, the countries choose not to specialise and trade.
What is a valid reason for this behaviour?
The cost of transport is high relative to the opportunity cost differences between the countries.
The exchange rate lies within the countries' opportunity cost ratios.
There is immobility of factors of production between the countries.
Trade is based on absolute rather than comparative advantage.