The reasons for international trade: Practice Questions

Which of the following is an assumed condition (limitation) in the theory of comparative advantage?

The following data shows the output per unit of resource for two countries, X and Y, producing Goods A and B.

Country X: Good A = 10, Good B = 5
Country Y: Good A = 8, Good B = 2

Based on the data, what is the opportunity cost of producing one unit of Good A in Country Y?

The table below shows the output per worker for two countries, Country Alpha and Country Beta, in producing Wheat and Textiles.

\(\begin{array}{|l|c|c|}\hline & \text{Wheat (units)} & \text{Textiles (units)} \\ \hline \text{Country Alpha} & 40 & 20 \\ \hline \text{Country Beta} & 10 & 10 \\ \hline \end{array}\)

Based on the theory of comparative advantage, at which of the following terms of trade would both countries find it mutually beneficial to trade Textiles for Wheat?

According to the principle of comparative advantage, under which condition is trade between two countries mutually beneficial?

In a two-country model, Country A has a comparative advantage in the production of wheat, where the opportunity cost of \( 1 \) unit of wheat is \( 2 \) units of textiles. In Country B, the opportunity cost of \( 1 \) unit of wheat is \( 4 \) units of textiles. Which of the following terms of trade would be mutually beneficial for both countries?

Using the theory of comparative advantage, explain why a country might still benefit from international trade even if it can produce all goods with fewer resources than its trading partner, and identify one limitation of this theory related to transport costs.

Consider two countries, Alpha and Beta, each producing only two goods: Textiles (T) and Computers (C). The table below shows the maximum output each country can produce if it allocates all its resources to one of the goods.

Country Alpha: Textiles = 100 units OR Computers = 50 units.
Country Beta: Textiles = 60 units OR Computers = 40 units.

(a) Using the theory of comparative advantage, explain which country has a comparative advantage in the production of Computers. Show your working by calculating the opportunity costs.

(b) Discuss the extent to which the trading possibility curve (TPC) allows both countries to consume beyond their domestic production possibility curves (PPC) if they agree on a terms of trade of \( 1 \) Computer for \( 1.75 \) units of Textiles.

(c) Explain two limitations of the theory of comparative advantage in explaining real-world international trade patterns.