3. a.

b. See Figure 3. With 100 million workers and four cars per worker, if either economy were devoted completely to cars, it could make 400 million cars. Since a U.S. worker can produce 10 tons of grain, if the United States produced only grain it would produce 1,000 million tons. Since a Japanese worker can produce 5 tons of grain, if Japan produced only grain it would produce 500 million tons. These are the intercepts of the production possibilities frontiers shown in the figure. Note that since the tradeoff between cars and grain is constant, the production possibilities frontier is a straight line.

e. Japan has a comparative advantage in producing cars, since it has a lower opportunity cost in terms of grain given up. The United States has a comparative advantage in producing grain, since it has a lower opportunity cost in terms of cars given up.

f. With half the workers in each country producing each of the goods, the United States would produce 200 million cars (that is 50 million workers times 4 cars each) and 500 million tons of grain (50 million workers times 10 tons each). Japan would produce 200 million cars (50 million workers times 4 cars each) and 250 million tons of grain (50 million workers times 5 tons each).

g. From any situation with no trade, in which each country is producing some cars and some grain, suppose the United States changed 1 worker from producing cars to producing grain. That worker would produce 4 fewer cars and 10 additional tons of grain. Then suppose the United States offers to trade 7 tons of grain to Japan for 4 cars. The United States will do this because it values 4 cars at 10 tons of grain, so it will be better off if the trade goes through. Suppose Japan changes 1 worker from producing grain to producing cars. That worker would produce 4 more cars and 5 fewer tons of grain. Japan will take the trade because it values 4 cars at 5 tons of grain, so it will be better off. With the trade and the change of 1 worker in both the United States and Japan, each country gets the same amount of cars as before and both get additional tons of grain (3 for the United States and 2 for Japan). Thus by trading and changing their production, both countries are better off.

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 is the student's comparative advantage.

9. 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.  Absolute Advantage

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 may be more valuable in the production of some goods and services. 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.

10. a. True; two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods. All that's necessary is that each country have a comparative advantage in some good.

b. False; it is not true that some people have a comparative advantage in everything they do. In fact, no one can have a comparative advantage in everything. Comparative advantage reflects the opportunity cost of one good or activity in terms of another. If you have a comparative advantage in one thing, you must have a comparative disadvantage in the other thing.

c. False; it is not true that if a trade is good for one person, it can't be good for the other one. Trades can and do benefit both sides¾ especially trades based on comparative advantage. If both sides didn't benefit, trades would never occur.

1. a. Consumption increases because a refrigerator is a good purchased by a household.

2. Investment increases because a house is an investment good.
3. Consumption increases because a car is a good purchased by a household, but investment decreases because the car in Ford’s inventory had been counted as an investment good until it was sold.
4. Consumption increases because pizza is a good purchased by a household.
5. Government purchases increase because the government spent money to provide a good to the public.
6. Consumption increases because the bottle is a good purchased by a household, but net exports decrease because the bottle was imported.
7. Investment increases because new structures and equipment were built.

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%.

Prices did not change from 2001 to 2002. Thus, the percentage change in the GDP deflator is zero. Likewise, output levels did not change from 2002 to 2003. This means that the percentage change in real GDP is zero.

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 ($9,873 - $9,269)/$9,269 ´ 100% = 6.5%.

b. The growth rate of the deflator is (118 - 113)/113 ´ 100% = 4.4%.

c. Real GDP in 1999 (in 1996 dollars) is $9,269/(113/100) = $8,203.

d. Real GDP in 2000 (in 1996 dollars) is $9,873/(118/100) = $8,367.

e. The growth rate of real GDP is ($8,367 - $8,203)/$8,203 ´ 100% = 2.0%.

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

12. a. The increased labor-force participation of women has increased GDP in the United States, since it means more people are working and production has increased.

b. If our measure of well-being included time spent working in the home and taking leisure, it wouldn't rise as much as GDP, since the rise in women's labor-force participation has reduced time spent working in the home and taking leisure.

c. Other aspects of well-being that are associated with the rise in women's increased labor-force participation include increased self-esteem and prestige for women in the workforce, especially at managerial levels, but decreased quality time spent with children, whose parents have less time to spend with them. Such aspects would be quite difficult to measure.