Chapter 2 Trade-offs, Comparative Advantage, and the Market System

Table 2-6

	Cell Phone	Lumber (board foot )
Estonia	20 hours	5 hours
Finland	18 hours	4 hours

39) Refer to Table 2-6. This table shows the number of labor hours required to produce a cell phone and a board foot of lumber in Estonia and Finland.

a. If each country has a total of 3,600 labor hours to devote to the production of the two goods, draw the production possibilities frontier for each country. Put "Cell Phone" on the horizontal axis and "Lumber" on the vertical axis. Be sure to identify the intercept values on your graphs.

b. Suppose each country allocates 55% its labor hours to lumber production and 45% to the production of cell phones. Complete Table 2-7 below to show each country's output of the two products.

Table 2-7: Production and Consumption with no Trade

	Cell Phone Output	Lumber Output (board feet)
Estonia
Finland
Total

c. If the two countries do not trade and consume whatever they produce, identify the current production and consumption point for each country on their respective production possibilities frontiers. Label Estonia's consumption point "E" and Finland's consumption point, "F."

d. Suppose the two countries specialize and trade. Who should produce cell phones and who should produce lumber? Explain your answer.

e. Complete Table 2-8 below to show each country's output with specialization.

Table 2-8: Output with Specialization

	Cell Phone Output	Lumber Output (board feet)
Estonia
Finland
Total

f. Did specialization increase the combined output for the two countries without any increase in resources? If so, by how much?

g. Suppose Estonia and Finland agree to trade so that in exchange for 400 board feet of lumber, the exporter of lumber receives 90 cell phones. Complete Table 2-9 below to show each country's consumption bundle after trade.

Table 2-9: Consumption with Trade

	Cell Phone	Lumber (board feet)
Estonia
Finland

h. Show the consumption points after trade on each country's production possibilities frontier. Label these points "X" for Estonia and "Y" for Finland.

i. Has trade made the two countries better off? Explain your answer.