Quebec is capable of producing 10 pallets of wood shingles or 8 barrels of maple syrup with a unit of labor. Vermont is capable of producing 12 pallets of wood shingles or 12 barrels of maple syrup with a unit of labor. Assume that this is typical of
the labor force as a whole. Which location has the absolute advantage and which has the comparative advantage, in the production of each good? Can these locations reap gains from trade?
From the numbers given, Vermont has the absolute advantage in both wood shingles and maple syrup. With regard to comparative advantage, the opportunity cost of 1 pallet of shingles in Quebec is 0.8 barrels of syrup, and in Vermont it is 1.0 barrel of syrup. Thus, Quebec has a comparative advantage in the production of shingles. The opportunity cost of a barrel of syrup in Quebec is 1.25 pallets of shingles, and in Vermont it is 1.0 pallet. Thus, Vermont has a comparative advantage in the production of syrup.
Both Quebec and Vermont can gain (i.e., increase consumption of shingles and syrup) if they specialize where they have a comparative advantage, and trade for the other good.
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Consider a closed economy without the government. If the GDP of the economy is $63,000 and the consumption in the economy is $45,000, the savings rate in the economy is:
A) 35.75%. B) 28.57%. C) 16.86%. D) 24%.
In the short run, in which of the following ways is an expansionary monetary policy most likely to cause the real interest rate and the value of the domestic currency to change?
a. increase; increase b. increase; decrease c. no change; decrease d. decrease; increase e. decrease; decrease