Balance of Payments & Comparative Advantage Problem Set
1. Which of the balance of payments accounts do the following events affect? a. Boeing, a U.S.-based company, sells a newly built airplane to China.
b. Chinese investors buy stock in Boeing from Americans.
c. A Chinese company buys a used airplane from American Airlines and ships it to China.
d. A Chinese investor who owns property in the United States buys a corporate jet, which he will keep in the United States so he can travel around America.
2. In the economy of Scottopia in 2008, exports equaled $400 billion of goods and $300 billion of services, imports equaled $500 billion of goods and $350 billion of services, and the rest of the world purchased $250 billion of Scottopia’s assets. What was the merchandise trade balance for Scottopia? What was the balance of payments on the current account in Scottopia? What as the balance of payments on financial account? What was the value of Scottopia’s purchases of assets from the rest of the world?
1. What does the production possibilities curve (PPC) show?
2. What does it mean for one country to have an absolute advantage over another in trade?
3. What does it mean for one country to have a comparative advantage over another in trade?
4. The U.S. and England have the following production possibility curves.
Using the information on the graphs above: A. The opportunity cost of 1 unit of Fish in the U.S. is ______.
B. The opportunity cost of 1 unit of Chips in the U.S. is ______.
C. The opportunity cost of 1 unit of Fish in England is ______.
D. The opportunity cost of 1 unit of Chips in England is ______.
E. The U.S. has an absolute advantage in ______.
F. England has an absolute advantage in ______.
G. The U.S. has a comparative advantage in ______.
H. England has a comparative advantage in ______.
5. Liam and Miley have two tasks they need to complete: mow the lawn and prepare meals for the day. They agree that trade is in their best interest, which is where they need your help. Using the information in the table below determine who should be responsible for the lawn and who should be working in the kitchen.
Mow Lawns Prepare Meals Liam 60 mins 120 mins Miley 120 mins 360 mins
A. Who has an absolute advantage in mowing lawns? ______
B. Who has an absolute advantage in preparing meals? ______
C. What is Liam’s opportunity cost associated with mowing 1 lawn? ______
D. What is Miley’s opportunity cost associated with mowing 1 lawn? ______
E. What is Liam’s opportunity cost associated with preparing 1 meal? ______
F. What is Miley’s opportunity cost associated with preparing 1 meal? ______
G. Who has a comparative advantage in mowing lawns? ______
H. Who has a comparative advantage in preparing meals? ______6. The following figures represent the amount that can be produced with a fixed amount of factor inputs.
Country Shirts TVs China 400 200 India 120 30
A. Which country has an absolute advantage in producing shirts? ______
B. Which country has an absolute advantage in producing TVs? ______
C. What is China’s opportunity cost for producing one shirt? ______
D. What is India’s opportunity cost for producing one TV? ______
E. Identify which country has a comparative advantage in shirts? ______
F. Which country has the comparative advantage in TV? ______
G. Explain why these countries can benefit from trade.