AP Macroeconomics : How to use tables
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Example Questions
Example Question #2 : Tables
Countries A & B can produce the following maximum quantities of cars and computers (when they use all their resources to produce one of the goods):
Country A: 500 computers OR 200 cars
Country B: 300 computers OR 100 cars
Which of the following is true about their trade potential?
If Country A and Country B were to enter into a trade agreement, Country B would be the only party to benefit
Country A would not accept any trade terms with Country B since it can produce more of both good A and good B
Country A and Country B can both benefit from trade since each has a comparative advantage in one of the goods
If Country A and Country B were to enter into a trade agreement, Country A would be the only party to benefit
None of the other answers
Country A and Country B can both benefit from trade since each has a comparative advantage in one of the goods
Trade does not depend on absolute advantage (who can produce the most of both goods) but comparative advantage (who can produce one good cheaper than the other). Country A can produce cars more cheaply than country B (1 car costs 2.5 computers for country A while it costs 3 computers for country B). Country B on the other hand can produce computers more cheaply than country A (1 computer costs 0.3 cars in country B while it costs 0.4 cars in country A). Thus they will both benefit from trade.
Example Question #2 : How To Use Tables
Countries A & B can produce the following maximum quantities of cars and computers (when they use all their resources to produce one of the goods):
Country A: 500 computers OR 200 cars
Country B: 300 computers OR 100 cars
If these countries were to trade, which of the following options give possible terms of trade?
To answer this question, you would have to tabulate the opportunity costs of both Country A and Country B in the production of cars and computers, this will allow you to consider what trades are possible and which are not. This would be the result of the table:
Opp costs of computer production
Country A: 1 computer = 0.4 cars
Country B: 1 computer = 0.3 cars
Opp costs of car production
Country A: 1 car = 2.5 computers
Country B: 1 car = 3 computers
This tells us that Country B will produce the majority of the computers, since they have a comparative advantage in that, and Country A will produce most of the cars since they have a comparative advantage in that. It follows then, that any terms of trade where Country A has to pay more than 0.4 cars for a computer would be unacceptable since then they would be better off making them themselves. Similarly, any terms of trade where Country B has to pay more than 3 computers to get a car would be unacceptable for the same reason. The only acceptable terms of trade in the options are 1 computer = 0.35 cars.
Example Question #3 : How To Use Tables
Countries A & B can produce the following maximum quantities of cars and computers (when they use all their resources to produce one of the goods):
Country A: 500 computers OR 200 cars
Country B: 300 computers OR 100 cars
If these countries were to trade, which of the following options give the trade outcomes that would result?
Country A would produce most of the cars and Country B would produce most of the computers
There would be no agreeable terms of trade since Country A produces more cars and more computers than Country B does.
Country A would produce more cars and more computers and trade them with Country B since they have a comparative advantage in producing both goods
Country B would produce most of the cars and Country A would produce most of the computers
There is not enough information to answer the question as stated
Country A would produce most of the cars and Country B would produce most of the computers
To answer this question, you would have to tabulate the opportunity costs of both Country A and Country B in the production of cars and computers, this will allow you to consider what trades are possible and which are not. This would be the result of the table:
Opp costs of computer production
Country A: 1 computer = 0.4 cars
Country B: 1 computer = 0.3 cars
Opp costs of car production
Country A: 1 car = 2.5 computers
Country B: 1 car = 3 computers
This tells us that Country B will produce the majority of the computers, since they have a comparative advantage in that, and Country A will produce most of the cars since they have a comparative advantage in that.
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