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Chapter 2. 6 & ch3. 6,9

The document discusses comparative advantage and gains from trade between two cities: Boston and Chicago. Boston has an absolute advantage in producing both red and white socks. However, Chicago has a comparative advantage in producing red socks because its opportunity cost is lower, while Boston has a comparative advantage in white socks. If the cities trade based on their comparative advantages, Boston will export white socks and Chicago will export red socks. Trade allows both cities to gain.

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0% found this document useful (0 votes)
47 views3 pages

Chapter 2. 6 & ch3. 6,9

The document discusses comparative advantage and gains from trade between two cities: Boston and Chicago. Boston has an absolute advantage in producing both red and white socks. However, Chicago has a comparative advantage in producing red socks because its opportunity cost is lower, while Boston has a comparative advantage in white socks. If the cities trade based on their comparative advantages, Boston will export white socks and Chicago will export red socks. Trade allows both cities to gain.

Uploaded by

Karo Moti
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 2:

6. Classify each of the following statements as positive or normative. Explain.

a. Society faces a short-run trade-off between inflation and unemployment.

It is positive statement because it is describing the fact that if there is high inflation we will face
low unemployment .Trade off Stimulates the overall level of spending and higher demand for
goods and services then firms raise prices; hire more workers; produce more goods and services
which lower unemployment and it could be the opposite if we think about low inflation and high
unemployment.

b. A reduction in the rate of money growth will reduce the rate of inflation.

It is positive statement because if there is more money in the market we are willing to spend
more to get what we want and the prices will increase but if the rate of money growth is reduced
the prices also reduce or the inflation reduces.

c. The Federal Reserve should reduce the rate of money growth.

It is normative statement because it is a prescriptive advice given by someone to the Federal


Reserve or someone is proposing the Federal Reserve to reduce the rate of money growth.

d. Society ought to require welfare recipients to look for jobs.

It is normative statement because it is talking about subjective possession and it is determined by


vote of the society not by the fact.

e. Lower tax rates encourage more work and more saving.

It is positive statement because when we have low tax rate we will have more available income
and this encourages us work more and we can save more money.

Chapter 3:

6. The following table describes the production possibilities of two cities in the country of
Baseballia:

Pairs of Red Socks Pairs of White Socks

……………… per Worker per Hour per Worker per Hour

Boston 3 3

Chicago 2 1
a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is
the price in Chicago?

In Boston: The price of one white sock is one red sock because they produce the same
amount (3) per worker per hour.

In Chicago: The price of one white sock is ½ or half of red socks because 2 pairs of red socks is
produced per worker per hour when only one pair of white socks is produced.

b. Which city has an absolute advantage in the production of each color sock? Which city
has a comparative advantage in the production of each color sock?

Boston city has absolute advantage in the production of each color sock because it can produce
3 red socks per worker per hour when Chicago produces only 2 and it can produce 3 white socks
per hour when Chicago produces only 1.

To know the comparative advantage we have to identify the opportunity cost of each:

For 1 pair of red socks For 1 pair of white socks


Boston 1 pair of white socks 1 pair of red socks
Chicago ½ pair of white socks 2 pairs of red socks
Therefore from this we can identify that, Boston has comparative advantage in white socks
and Chicago has comparative advantage in red socks.

c. If the cities trade with each other, which color sock will each export?

Boston will trade white socks because it has comparative advantage in white socks and Chicago
will trade red socks because it has comparative advantage in red socks.

d. What is the range of prices at which trade can occur?

For red socks the price oscillates between ½ and 1 so the range is (½, 1) and

For white socks the price oscillates between 1 and 2 so the range is (1, 2)

9. Are the following statements true or false? Explain in each case.

a. “Two countries can achieve gains from trade even if one of the countries has an absolute
advantage in the production of all goods.”

True because of comparative advantage they can achieve from trade.

b. “Certain talented people have a comparative advantage in everything they do.”


False. Because the fact of just little difference can make someone with lower opportunity cost.

c. “If a certain trade is good for one person, it can’t be good for the other one.”

False .Because due to the comparative advantage each person can specialize in what they are
good at so everyone is going to be better.

d. “If a certain trade is good for one person, it is always good for the other one.”
False .Because they may have comparative advantage over each other.

e. “If trade is good for a country, it must be good for everyone in the country.”

False. This generalization may not stand for every individual Because everybody has his/her
own thing which he/she is good at and bad at. Therefore it is not obligatory.

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