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Power of trade Essay

 1. Use the idea of the division of knowledge to answer the following questions. (a). Which country has more knowledge: Utopia, where in the words of Karl Marx, each person knows just enough about hunting, shing, and cattle raising to hunt in the morning, sh in the afternoon, [and] rear cattle in the evening, or Drudgia, where one-third of the population learns only about hunting, onethird only about shing, and one-third only about cattle raising?

GHOST
ANSWER:
There is more knowledge in Drudgia.
(b). Which planet has more knowledge: Xeroxia, each of whose one million inhabitants knows the same list of one million facts, or Dierentia, whose one million inhabitants each know a dierent set of one million facts? How many facts are known in Xeroxia? How many facts are known in Dierentia?

GHOST ANSWER:
In Xeroxia, people know one million facts. In Dierentia, people know one trillion facts, a million times more. We would expect Dierentia to have a higher standard of living. 2. In the Wealth of Nations, Adam Smith said that one reason specialization makes someone more productive is because a man commonly saunters a little in turning his hand from one sort of employment to another. How can you use this observation to improve your pattern of studying for your four or ve college courses this semester?

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ANSWER:
You should set aside long blocks of time (perhaps 1 to 2 hours) for each individual course, rather than switching every 15 minutes from reading biology to reading economics and back again. Every time you switch jobs, you waste some time getting used to the new task.

3. Opportunity cost is one of the tougher ideas in economics. Let’s make it easier by starting with some simple examples.

In the examples below, nd the opportunity cost: Your answer should be a rate, as

in 1.5 widgets per year or 6 lectures per month. Ignoring Adam Smith’s insight from the previous question, assume that these relationships are simple linear ones, so that if you put in twice the time you get twice the output, and half the time yields half the output. (a). Erin has a choice between two activities: She can repair one transmission per hour or she can repair two fuel injectors per hour. What is the opportunity cost of repairing one transmission? GHOST

ANSWER:
2 fuel injectors.
(b).

Katie works at a customer service center and every hour she has a choice between two activities:

answering 200 telephone calls per hour or responding to 400 emails per hour. What is the opportunity cost of responding to 400 phone calls?
GHOST
ANSWER:
800 emails.
(c). Deirdre has a choice between writing one more book this year or ve more
articles this year. What is the opportunity cost of writing half of a book this year, in terms of articles? GHOST
ANSWER:
2.5 articles.
4. (a). American workers are typically paid much more than Chinese workers. True or false: This is largely because American workers are typically more productive than Chinese workers. GHOST
ANSWER:
True. Productivity dierences are the biggest reason for wage dierences. (b). Julia Child, an American chef (and World War II spy) who reintroduced French cooking to Americans in the 1960s, was paid much more than most American chefs. True or false: This was largely because Julia Child was much more productive than most American chefs. GHOST

ANSWER:
True. Although Julia Child could not cook a 3-minute egg any faster than any other chef, her valuable output included her television show and many cookbooks. Thus, as a celebrity chef and cookbook author, Julia Child produced much more GDP than the typical restaurant chef and was more productive. 5. According to the Wall Street Journal (August 30, 2007, In the Balance ), it takes about 30 hours to assemble a vehicle in the United States. Let’s use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, North is shorthand for the high-tech developed countries of East Asia, North America, and Western Europe, while South is shorthand for the rest of the world. Let’s use that shorthand here. (a).

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ANSWER:
North has an absolute advantage at both high-quality and low-quality cars. (b).

Using the information in the productivity table above, estimate the opportunity cost of making

high- or low-quality cars in the North and in the South. Which region has a comparative advantage (i.e., lowest opportunity cost) for manufacturing high-quality cars? For low-quality cars?

North
South

Opportunity Cost of Making One High-quality Car
_____low-quality cars
_____low-quality cars

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ANSWER:

Opportunity Cost of Making One Low-quality Car
_____high-quality cars
_____high-quality cars

After calculating opportunity costs horizontally within countries, compare them vertically across countries to determine who has a comparative advantage. North’s comparative advantage is high-quality cars (lower opportunity cost of making high-quality cars). South’s comparative advantage is low-quality cars (lower opportunity cost of making low-quality cars).

North
South

Opportunity Cost of Making One High-quality Car
1.5 low-quality cars
2 low-quality cars

Opportunity Cost of Making One Low-quality Car
2/3 high-quality cars
0.5 high-quality cars

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There are 1 million hours of labor available for making cars in the North, and another 1 million

hours of labor available for making cars in the South. In a no-trade world, let’s assume that two-thirds of the auto industry labor in each region is used to make high-quality cars and one-third is used to make low-quality cars. Solve for how many of each kind of car will be produced in North and South, and add up to determine total global output of each type of car. (Why will both kinds of cars be made? Because the low-quality cars will be less
expensive.)

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(d). Now, allow specialization. If each region completely specializes in the type of car in which it holds the comparative advantage, what will global output of high-quality cars be? Of low-quality cars? In the table below, report your answers. Is global output in each kind of car higher than before? (We’ll solve a problem with the nal step of trade in the Thinking and Problem Solving section.)

GHOST
6. Conan O’Brien has been a talk show host since 1993, but he began his career in comedy as a writer: rst at the Harvard Lampoon while in college, then eventually at Saturday Night Live and The Simpsons. Given that he is such an accomplished comedy writer, it might be surprising to learn that his current talk show sta includes over a dozen writers. How can you explain this using the material covered in the chapter? Is Conan not capable enough a writer to write his own show, or is there some other explanation? Suppose none of Conan’s writers are as funny a writer as he is; is it still possible that hiring a writing sta makes the show funnier?

GHOST
ANSWER:
There are many tasks involved in creating a funny and successful talk show; it’s not all just writing. So while Conan may be a very accomplished writer, he may also have other skills that he contributes to the show in dierent ways: producing, leading, hosting, forming a creative vision, preparing for interviews, etc. If Conan decided to write every sketch and every monologue joke, the monologues might be funnier, but other parts of the show would suer too much.

His advantage as a host and producer, and leader and visionary must be

greater than his advantage as a writer. It makes perfect sense for him to hire writers who can execute his vision even if not perfectly, so that he can dedicate more time to the other activities that make the show funny. For example, if he had to write every sketch, he might not have time to come up with as many sketch ideas, so the show overall would be less funny.

Thinking and Problem Solving

1. Fit each of the following examples into one of these reasons for trade:

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I. Division of knowledge

II. Comparative advantage
GHOST
(a). Two recently abandoned cats, Bingo and Tuppy, need to quickly learn how to catch mice in order to survive. If they also remain well groomed, they stand a better chance of surviving: Good grooming reduces the risk of disease and parasites. Each cat could go it alone, focusing almost exclusively on learning to catch mice.The alternative would be for Bingo to specialize in learning how to groom well and for Tuppy to specialize in learning how to catch mice well.

GHOST
ANSWER:
Division of knowledge
(b). Former President Bill Clinton, a graduate of Yale Law School, hires attorneys who are less skilled than himself to do routine legal work.
GHOST
ANSWER:
Comparative advantage
2. Nobel Laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both true and not obvious. Since it’s not obvious, we should practice with it a bit. In each of the cases below, who has the absolute advantage at each task, and who has the comparative advantage? (a). In 30 minutes, Kana can either make miso soup or she can clean the kitchen. In 15 minutes, Mitchell can make miso soup; it takes
Mitchell an hour to clean the kitchen. GHOST

ANSWER:
Mitchell’s absolute and comparative advantages are at miso; Kana’s absolute and comparative advantages are at cleaning.

In one hour, Ethan can bake 20 cookies or lay the drywall for two rooms.

In one hour, Sienna

can bake 100 cookies or lay the drywall for three rooms.
GHOST
ANSWER:
Sienna has an absolute advantage at both, but her comparative advantage is at baking cookies. Ethan’s comparative advantage is at laying drywall. (c). Kara can build two glass sculptures per day or she can design two full-page newspaper advertisements per day. Sara can build one glass sculpture per day or design four full-page newspaper ads per day. GHOST

ANSWER:
Kara’s absolute and comparative advantages are at sculpture, while Sara’s absolute and comparative advantages are at newspaper ad design.
(d). Data can write 12 excellent poems per day or solve 100 dicult physics problems per day. Riker can write one excellent poem per day or solve 0.5 dicult physics problems per day. GHOST
ANSWER:
Data has an absolute advantage at both, but Riker has a comparative advantage at writing poetry. 3. The federal education reform law known as No Child Left Behind requires every state to create standardized tests that measure whether students have mastered key subjects.

Since the same test is given to

all students in the same grade in the state, this encourages all schools within a state to cover the same material. According to the division of knowledge model, what are the costs of this approach? GHOST

ANSWER:
The cost is that with everyone knowing the same thing, our hive mind, our social knowledge, is less powerful than it could be. For instance, some parts of a state might emphasize statistics courses in high school while other parts might emphasize geometry and other parts might emphasize number theory. Each could be useful at a particular place and time, but few students would have the time to master all three elds. But it’s not necessary for everyone to master all three: It’s enough to have a few (thousand) people who master each eld, just in case a need arises.

Undergraduate university education is more specialized than high school, graduate university education is more specialized yet. Indeed, the ideal of a graduate education is that at some point the PhD candidate knows something that no one else in the world knows! 4. In this chapter, we’ve often emphasized how specialization and exchange can create more output. But sometimes the output from voluntary exchange is dicult to measure and doesn’t show up in GDP statistics.

In each of the following cases, explain how the two parties involved might be able to make

themselves both better o just by making a voluntary exchange. (a). Alan received two copies of Gears of War as birthday gifts. Burton received two copies of Halo as birthday gifts.
GHOST
ANSWER:
Alan could give one of his copies of Gears to Burton, who could oer one of his copies of Halo. (b).

Jeb has a free subscription to Field and Stream but isn’t interested in hunting.

George has a

free subscription to the Miami Herald but isn’t all that interested in Florida news. GHOST
ANSWER:
They could swap free subscriptions, and both be better o, especially if both men have the last name Bush. At the very least, both parties are no worse o after the exchange. (c). Pat has a lot of love to give, but it is worthless unless received by another. Terry is in the same sad situation.

GHOST
ANSWER:
If they oer love to each other, both will be better o at no cost: A classic positive-sum game.

5. Here’s another specialization and exchange problem.This problem is wholly madeup, so that you won’t be able to use your intuition about the names of countries or the products to gure out the answer. (a). Consider the productivity table below: Which country has an absolute advantage at making rotids? At making taurons?


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