4. a. Pat’s opportunity cost of making a pizza is 1/2 gallon of root beer, since she could brew 1/2 gallon in the time (2 hours) it takes her to make a pizza. Pat has an absolute advantage in making pizza since she can make one in two hours, while it takes Kris four hours. Kris’s opportunity cost of making a pizza is 2/3 gallons of root beer, since she could brew 2/3 of a gallon in the time (4 hours) it takes her to make a pizza. Since Pat’s opportunity cost of making pizza is less than Kris’s, Pat has a comparative advantage in making pizza.

b. Since Pat has a comparative advantage in making pizza, she will make pizza and exchange it for root beer that Kris makes.

c. The highest price of pizza in terms of root beer that will make both roommates better off is 2/3 gallons of root beer. If the price were higher than that, then Kris would prefer making her own pizza (at an opportunity cost of 2/3 gallons of root beer) rather than trading for pizza that Pat makes. The lowest price of pizza in terms of root beer that will make both roommates better off is 1/2 gallon of root beer. If the price were lower than that, then Pat would prefer making her own root beer (she can make 1/2 gallon of root beer instead of making a pizza) rather than trading for root beer that Kris makes.

6. Though the professor could do both writing and data collection faster than the student (that is, he has an absolute advantage in both), his time is limited. If the professor’s comparative advantage is in writing, it makes sense for him to pay a student to collect the data, since that’s the student’s comparative advantage.

8. a. Technological advance lowers the opportunity cost of producing meat for the farmer. The opportunity cost of producing a point of meat was 2 pounds of potatoes; it’s now 1/5 pounds of potatoes. Thus the farmer’s opportunity cost of producing potatoes is now 5 pounds of meat. Since the rancher’s opportunity cost of producing potatoes is 8 pounds of meat, the farmer still has a comparative advantage in producing potatoes and the rancher still has a comparative advantage in producing meat.

b. Now the farmer won’t be willing to trade a pound of potatoes for 3 pounds of meat because if he produced one less pound of potatoes, he could produce 5 more pounds of meat. So the trade would be bad for the farmer, as he would then be consuming inside his production possibilities frontier.

c. The farmer and rancher would now be willing to trade one pound of potatoes for an amount between 5 and 8 pounds of meat, with the potatoes being produced by the farmer and the meat being produced by the rancher.

9. a. With no trade, one pair of white socks trades for one pair of red socks in Boston, since productivity is the same for the two types of socks. The price in Chicago is 2 pairs of red socks per pair of white socks.

b. Boston has an absolute advantage in the production of both types of socks, since a worker in Boston produces more (3 pairs of socks per hour) than a worker in Chicago (2 pairs of red socks per hour or 1 pair of white socks per hour).

Chicago has a comparative advantage in producing red socks, since the opportunity cost of producing a pair of red socks in Chicago is 1/2 pair of white socks, while the opportunity cost of producing a pair of red socks in Boston is 1 pair of white socks. Boston has a comparative advantage in producing white socks, since the opportunity cost of producing a pair of white socks in Boston is 1 pair of red socks, while the opportunity cost of producing a pair of white socks in Chicago is 2 pairs of red socks.

c. If they trade socks, Boston will produce white socks for export, since it has the comparative advantage in white socks, while Chicago produces red socks for export, which is Chicago’s comparative advantage.

d. Trade can occur at any price between 1 and 2 pairs of red socks per pair of white socks. At a price lower than 1 pair of red socks per pair of white socks, Boston will choose to produce its own red socks (at a cost of 1 pair of red socks per pair of white socks) instead of buying them from Chicago. At a price higher than 2 pairs of red socks per pair of white socks, Chicago will choose to produce its own white socks (at a cost of 2 pairs of red socks per pair of white socks) instead of buying them from Boston.

10. a. The cost of all goods is lower in Germany than in France in the sense that all goods can be produced with fewer worker hours.

b. The cost of any good for which France has a comparative advantage is lower in France than in Germany. Though Germany produces all goods with less labor, that labor is more valuable. So the cost of production, in terms of opportunity cost, will be lower in France for some goods.

c. Trade between Germany and France will benefit both countries. For each good in which it has a comparative advantage, each country should produce more goods than it consumes, trading the rest to the other country. Total consumption will be higher in both countries as a result.

5. a. Calculating nominal GDP:

2001: ($1 per qt. of milk ´ 100 qts. milk) + ($2 per qt. of honey ´ 50 qts. honey) = $200

2002: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400

2003: ($2 per qt. of milk ´ 200 qts. milk) + ($4 per qt. of honey ´ 100 qts. honey) = $800

Calculating real GDP (base year 2001):

2001: ($1 per qt. of milk ´ 100 qts. milk) + ($2 per qt. of honey ´ 50 qts. honey) = $200

2002: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400

2003: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400

Calculating the GDP deflator:

2001: ($200/$200) ´ 100 = 100

2002: ($400/$400) ´ 100 = 100

2003: ($800/$400) ´ 100 = 200

b. Calculating the percentage change in nominal GDP:

Percentage change in nominal GDP in 2002 = [($400 - $200)/$200] ´ 100 = 100%.

Percentage change in nominal GDP in 2003 = [($800 - $400)/$400] ´ 100 = 100%.

Calculating the percentage change in real GDP:

Percentage change in real GDP in 2002 = [($400 - $200)/$200] ´ 100 = 100%.

Percentage change in real GDP in 2003 = [($400 - $400)/$400] ´ 100 = 0%.

Calculating the percentage change in GDP deflator:

Percentage change in the GDP deflator in 2002 = [(100 - 100)/100] ´ 100 = 0%.

Percentage change in the GDP deflator in 2003 = [(200 - 100)/100] ´ 100 = 100%.

c. Economic well-being rose more in 2002 than in 2003, since real GDP rose in 2002 but not in 2003. In 2002, real GDP rose and prices didn’t. In 2003, real GDP didn’t rise and prices did.

6.

a. The growth rate of nominal GDP is ($8,111 - $7,662)/$7,662 ´ 100% = 5.9%.

b. The growth rate of the deflator is (112 - 110)/110 ´ 100% = 1.8%.

c. Real GDP in 1996 (in 1992 dollars) is $7,662/(110/100) = $6,965.

d. Real GDP in 1997 (in 1992 dollars) is $8,111/(112/100) = $7,242.

e. The growth rate of real GDP is ($7,242 - $6,965)/$6,965 ´ 100% = 4.0%.

f. The growth rate of nominal GDP is higher than the growth rate of real GDP because of inflation.