7. What is the law of comparative advantage? According to the law of comparative advantage, what should be the distin- guishing characteristics of the goods a nation produces? What should be the distinguishing characteristics of the goods a na- tion imports? How will international trade influence people's production levels and living standards? Explain. 15

The fictional country of Anastialia is a small country with rich resources in minerals. In a day it can produce 100 pounds of silver or 50 pounds of copper. Another country, West Burma, can produce 25 pounds of silver or 5 pounds of copper in a day. From this data, which country has the comparative advantage in copper production by producing it at a lower opportunity cost? O Neither country has a comparative advantage. O Anastialia O West Burma

1. One German worker can produce either 5 cars or 10 tons of grain a year. One Japanese worker can produce either 4 cars or 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers. Japan well as the PPE 6 L which country has an absolute advantage in produ f) Given all the information above, which country has a comparative advantage in producing cars? Which country has a comparative advantage in producing grain? Why? g) Both countries will spend half of each country's workers produce cars and half produce grain. Complete the following table with the quantities of cars produced and consumed in each country if there is no trade. Car Produced and Consumed (million) Tons of Grain Produced and Consumed (million) Germany Japan h) If each country only produces the good in which they have a comparative advantage and then traded 300 million tons of grain for 200 million cars, will both countries be better off? Why?

Assume the following information shows the output of 2 goods in 2 countries before specialization.  [Also assume that the same amount of resources are used by both countries and are equally divided between their two industries, 1 and 3.]   Automobiles Computers U.S. 20 15 Germany 15 5 Which country has the absolute advantage in automobile production?  Why? In Germany, the opportunity cost of producing 1 automobile is the loss of _________. Which country has the comparative advantage in automobile production?  Why? If both countries produce according to the respective comparative advantages, what goods will the U.S. and Germany end up producing after specialization? Gains from Trade:  How many more units of total output (automobiles + computers) will be produced after specialization? Terms of Trade:  If the U.S. and Germany trade with each other, and the U.S. sends Germany 10 computers, at least how many autos will the U.S. expect in return?  Be specific. Draw the PPF for…