ECON 1301 Answer_Key_Macro_Topic_1.3A-_Comparative_Advantage_and_Trade-2 AP Macro Topic 1.3 Comparative Advantage and Trade.

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1. Identify which country has the absolute advantage in chips. ​Luxland 2. Identify which country has the absolute advantage in pretzels. ​Luxland 3. Calculate the opportunity cost of producin... g one chip in Luxland. ​1 pretzel 4. Calculate the opportunity cost of producing one pretzel in Leanderland. ​½ chip 5. Identify which country has the comparative advantage in pretzels. ​Leanderland 6. Identify which country has the comparative advantage in chips. ​Luxland 7. If the two countries specialize and trade, which country will import chips? Explain. ​Leanderland will import chips. Leanderland has a comparative advantage in pretzels so they will produce pretzels and import chips 8. If the terms of trade are 4 chips for 1 pretzel, would trade be advantageous for Luxland? Explain No, Luxland could make 1 pretzel for a cost of 1 chip. For Luxland, trading 1 pretzel for 4 chips is more expensive than just producing 1 pretzel on their own. 9. If the terms of trade are 4 chips for 1 pretzel, would trade be advantageous for Leanderland? Explain. ​Yes, if Leanderland produces 1 chip on their own it will cost them 2 pretzels, but if they trade they can get 1 chip for only ¼ a pretzel. They would be gaining more than if they produced chips themselves. 10. Assume that Luxland and Leanderland specialize and trade in a way that is advantageous for both of them. Explain what will happen to the number of pretzels that Leanderland can produce. ​The amount of pretzels that Leanderland can produce would stay the same. Specialization and trade doesn’t change the amount that either country CAN produce. Specialization means that Leanderland would make only pretzels and Luzland would make only chips, then they would trade. Part 2: Stretch Your Thinking- ​Answer the following questions assuming that advancements in technology cause Leanderland to double the amount of chips and pretzels they can produce. 11. Which country has the comparative advantage in the production of chips? Explain. ​Luxland still has comparative advantage in chips. Despite doubling production of both products, Leanderland’s PER UNIT opportunity cost of each product remains the same. 12. Identify a terms of trade that would be advantageous for both countries. ​1 chip for 1.5 pretzel OR 1 pretzel for ¾ of a chip (other possible answers) [Show More]

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