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Chapter 20: Q8. (page 431)

  1. We see quite a bit of international trade in the real world. And trade is driven by specialization. So why don’t we see full specialization—for instance, all cars in the world being made in South Korea, or all the mobile phones in the world being made in China? Choose the best answer from among the following choices.

  1. High tariffs.

  2. Extensive import quotas.

  3. Increasing opportunity costs.

  4. Increasing returns.

Short Answer

Expert verified

The correct option is c) Increasing opportunity costs.

Step by step solution

01

Step 1. Explanation 

The production of goods requires resources which is scarce and limited; this resource has alternative uses. If an economy produces two goods, then to increase the production of one good, the other good production has to be reduced. Thus, opportunity cost is involved; when an economy increases production, the opportunity cost of producing that good also rises. Hence, when a nation goes for complete specialization, all the resources have to be devoted there; thus, the opportunity increases as the resources are taken from one activity to another.

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Most popular questions from this chapter

Suppose that if Iceland and Japan were both closed economies, the domestic price of fish would be \(100 per ton in Iceland and \)90 per ton in Japan. If the two countries decided to open up to international trade with each other, which of the following could be the equilibrium international price of fish once they begin trading?

a. \(75

b. \)85

c. \(95

d. \)105

Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States’ most important trading partner, quantitatively? With what country does the United States have the largest trade deficit?

Suppose that the opportunity-cost ratio for fish and lumber is 1F ≡ 1L in Canada but 2F ≡ 1L in Iceland. Then ________ should specialize in producing fish while ________ should specialize in producing lumber.

  1. Canada; Iceland

  2. Iceland; Canada

The accompanying hypothetical production possibilities tables are for New Zealand and Spain. Each country can produce apples and plums. Plot the production possibilities data for each of the two countries separately. Referring to your graphs, answer the following:

New Zealand’s Production Possibilities Table (Millions of Bushels)


Production Alternatives

Product

A

B

C

D

Apples

0

20

40

60

Plums

15

10

5

0


Spain’s Production Possibilities Table (Millions of Bushels)


Production Alternatives

Product

R

S

T

U

Apples

0

20

40

60

Plums

60

40

20

0

  1. What is each country’s cost ratio of producing plums and apples?

  2. Which nation should specialize in which product?

  3. Show the trading possibilities lines for each nation if the actual terms of trade are 1 plum for 2 apples. (Plot these lines on your graph.)

  4. Suppose the optimum product mixes before specialization and trade were alternative B in New Zealand and alternative S in Spain. What would be the gains from specialization and trade?

Suppose that the opportunity-cost ratio for sugar and almonds is 4S ≡ 1A in Hawaii but 1S ≡ 2A in California. Which state has the comparative advantage in producing almonds?

  1. Hawaii

  2. California

  3. Neither
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