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Principles of Macroeconomics

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1. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade between individuals or countries? Is it absolute advantage or comparative advantage? Why? The difference between is that comparative advantage is when a good is produced at a lower opportunity cost (Mankiw 2015). Absolute advantage is when a good is produced using less inputs than another producer (Mankiw 2015). Comparative advantage is more important in determining trade because when countries trade they will trade a good that has a low opportunity cost with another country who will in turn trade their goods that have a low opportunity cost and both countries will benefit from the trade (Mankiw 2015 p.58). 2. Let us assume two students must prepare a presentation for their marketing class. As part of their class presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Larry 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Kate 12 hours to do the series of the calculations and 20 hours to prepare the PPT slides.

A. How much time would it take the two students to complete the project if they divide the two tasks equally? If Larry and Kate divided to two tasks equally it would be based how many hours it each of them to complete each task times half and totaled. Larry’s time is 10 hrs. for calculations and 10 hrs. to prepare slides ½ (10) = 5hrs to calculate

½ (10) = 5hrs to prepare slides
5 + 5 = 10
Kate’s time is 12 hrs. for calculations and 20 hrs. to prepare slides ½(12) = 6hrs to calculate
½(20) = 10hrs to calculate
6 + 10 = 16
Calculations total = 11
Slide total = 15
Total time = 26 hrs.

B. How much time would it take the two students to complete the project if they use comparative advantage and specialize in calculating or preparing slides?

If Larry and Kate use comparative advantage to complete the project Larry will prepare slides and Kate will calculate. Larry will use 10 hrs. for preparing slides
Kate will use 12 hrs. for calculations.
Total time 22 hrs.

C. If Larry and Kate have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or preparing slides?

No there is not a better solution.

3. Let us assume there are only two countries in the world, and the two countries face the following production possibilities frontiers. Further assume that the two countries produce popcorn and peanuts.

Country A’s Production Possibilities FrontierCountry B’s Production Possibilities Frontier

A. Assume that country A and country B decide to use half of the resources in the production of each good. Indicate the points of the maximum output of each good on the graphs for each country as point A under such resource use.

Country A would produce 125 units of peanuts and 75 units of popcorn.

Country B would produce 50 units of peanuts and 150 units of popcorn

B. Assume the two countries choose autarky and do not trade. What would be the total world production of popcorn and peanuts under the autarky?

The total world production of popcorn would be 225 units.
The total world production of peanuts would be 175 units.

C. Assume that each country decides to specialize in either popcorn or peanut based on its respective comparative advantage. Under the specialization, what is the total production of popcorn and peanuts?

Under the specialization, the total world production of popcorn is 300 units. Under the specialization, the total world production of peanuts is 250 units.

D. Assume country A and B decide to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country receives from trade. Label these points on the two graphs “B.”

Country A produces 250 units of peanuts and then trades 100 units to Country B keeping 150 units of peanuts. In return Country A will receive 100 units of popcorn from Country B.

Country B produces 300 units of popcorn and then trades 100 units to Country A keeping 100 units of popcorn. In return Country B receives 100 units of peanuts from Country A.

Mankiw, N, G. (2015). Principles of Macroeconomics. Ten Principles of Economics. [VitalSource Bookshelf version]. pp 52, 53.58 Retrieved from http://online.vitalsource.com/#/books/9781305156067/pages/0

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