International Economics Sixteenth Edition THOMAS A. PUGEL Week 02 – Read Chapters 3 and 4 As the science of Economics developed, Adam Smith thought that trade was determined by Absolute Advantage. David Riccardo refined that theory and showed that trade was determined by Comparative Advantage. Explain and discuss the differences. How does the theory of Factor Availability fit in with the theory of Comparative Advantage? Explain and discuss the differences. Solve this trade problem: Assume Mexico could use all its resources to produce 220 tons of tomatoes, or it could use all its resources to produce 80 tons of grapes. Assume France could use all its resources to produce 160 tons of tomatoes, or it could use all its resources to produce 210 tons of grapes. _____ (a) For Mexico, what is the opportunity cost of 1 ton of tomatoes, in terms of the number of tons of grapes given up? _____ (b) For Mexico, what is the opportunity cost of 1 ton of grapes, in terms of the number of tons of tomatoes given up? _____ (c) For France, what is the opportunity cost of 1 ton of tomatoes, in terms of the number of tons of grapes given up? _____ (d) For France, what is the opportunity cost of 1 ton of grapes, in terms of the number of tons of tomatoes given up? _____ (e) Which country has the Absolute Advantage in producing tomatoes? _____ (f) Which country has the Absolute Advantage in producing grapes? _____ (g) Which country has the Comparative Advantage in producing tomatoes? _____ (h) Which country has the Comparative Advantage in producing grapes? _____ (i) Which country will specialize in the production of tomatoes, and export it to the other country in return for grapes? _____ (j) Which country will specialize in the production of grapes, and export them to the other country in return for tomatoes? Think of the last two products or services you bought. Why did you buy them? What were your opportunity costs? Did those selling them to you provide the goods because they cared about your needs? How do these questions relate to Adam Smith’s statement from The Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker that you expect our dinner, but from their regard to their own interest? We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
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