Week 13 · Chapter

Chapter 13 — International Trade & Comparative Advantage

Principles of Macroeconomics Free sample edition

The module's primary reading · ~35–45 minutes · Objective 8 (analyze the short-run and long-run Phillips curve and the quantity equation of money, and apply open-economy tools — comparative advantage and the gains from trade, the trade balance, exchange rates, and the balance of payments — and weigh the Keynesian and classical / monetarist views of stabilization policy evenhandedly), with Objective 1 (apply the tools of macroeconomic modeling — scarcity, opportunity cost, the production possibilities frontier, and the circular-flow model — and distinguish positive statements (what is) from normative statements (what ought to be)) · Read it first this week; the lecture, the slides, the tutorial, the quiz, and the Model Workshop all build on it.

In plain language

This week asks why whole countries trade, and who gains when they do. The answer starts with a familiar idea: every choice gives something up. A country gains by making the goods it gives up the least to make, which is its comparative advantage (the lower cost of a good, counted in the other good you give up). When two countries each make what they are relatively good at and swap, both can end up with more of everything. You will also learn to read a trade deficit calmly, and to weigh the arguments for and against taxes on imports without picking a side for you.

Why you already care about this

Count the people who made your breakfast. Someone grew the grain. Someone else roasted the coffee, and a third person drove the truck that brought it. You did none of that. You spent your hours on one job, or on one field of study, and you traded the results for everything else.

Here is a small, illustrative version with made-up numbers. Suppose you could spend 5 hours on a free evening baking a week's bread. Or you could work those 5 hours at 18 dollars an hour and earn 5 × 18 = 90 dollars. That 90 dollars is the opportunity cost of baking your own bread, the Week 1 idea. If a bakery sells you the same bread for 20 dollars, then buying it saves you 90 − 20 = 70 dollars of your time. You specialize, and you trade.

Whole countries make the same kind of choice. This chapter shows why specializing pays even for a country that is better at everything, and what the arguments over trade policy are really about.

By the end of this chapter you will be able to:

tell absolute advantage from comparative advantage, using output per worker-day;
build an opportunity-cost table one ratio at a time, with each ratio the right way up;
name which country has the comparative advantage in each good;
find the range of terms of trade that benefits both countries;
prove the gains from trade with a before-and-after table;
read a trade balance in words, and describe a trade deficit neutrally;
lay out the case for freer trade and the case for protection at full strength, labelling positive and normative claims.

Carry this line with you: count what you give up — not what you make.

Where we are

Already covered: Week 1, The Macro Perspective, taught opportunity cost, the production possibilities frontier, and the line between positive and normative statements. Week 2, Measuring Output, built GDP = C + I + G + NX, with net exports NX = X − IM. Week 12, Inflation, the Phillips Curve & Expectations, closed the unit on money and prices.
This week: a new unit on the open economy begins. You learn why countries specialize and trade, how the price of a trade is set, how to prove both sides gain, how to read the trade balance, and how to weigh trade policy.
How they connect: this week puts Week 1's opportunity cost to work across a border, and it reads Week 2's net exports as the trade balance.
Where we're going next: Week 14, Open-Economy Macro: Exchange Rates & the Balance of Payments, adds the money side of trade: the price of one currency in another and what it does to exports.

Two earlier ideas carry this chapter. From Week 1, the opportunity cost of a choice is the best alternative you give up, measured here in units of the other good. From Week 2, net exports are exports minus imports, and they enter GDP with their sign. Keep both close; every table below is built from them.

1. Meet two countries: who makes more?

Picture two workers in a kitchen. One can chop 10 onions in the time the other chops 6. The first one is faster at chopping. That is the everyday idea behind absolute advantage: more output from the same effort.

Now meet two illustrative countries, constructed for this course and not real data. Northland and Southland each make two goods, wheat and cloth. To compare them fairly, measure each country's output from the same resource: one worker-day, one worker's labor for one day.

Output from one worker-day in each country (Dataset N, illustrative; wheat and cloth in units)
Country	Wheat per worker-day	Cloth per worker-day
Northland	4	2
Southland	6	2

Absolute advantage is the ability to produce more of a good than another producer can from the same resources, such as more units per worker-day.

Worked example — reading absolute advantage. Compare the rows one good at a time (Dataset N, illustrative).

Wheat. Southland makes 6 and Northland makes 4. Then 6 − 4 = 2 more wheat, so Southland has the absolute advantage in wheat.
Cloth. Both make 2. Neither makes more, so the two countries tie in cloth.

In words: Southland makes more wheat per worker-day, and the two countries make the same amount of cloth. Southland is at least as productive as Northland at everything.

That last sentence sounds like bad news for Northland. If Southland is at least as good at both goods, why would it ever buy anything from Northland? Hold that question. The next three sections answer it, and the answer surprises most people.

Misconception check. Students often think a country that makes more of every good has nothing to gain from trade. That is tempting, because in sports and in school the stronger side usually wins. But trade is not a contest with one winner. As you will see, what matters is what each country gives up, not how much it makes. Southland will gain from trading with Northland even though Northland never out-produces it.

Memory hook: absolute advantage counts output; it does not settle who should make what.

2. Build the opportunity-cost table, one ratio at a time

Go back to Week 1's free evening. The cost of baking bread was not the flour. It was the 90 dollars of work you gave up. Countries face the same kind of cost. A worker-day spent on cloth is a worker-day not spent on wheat.

Opportunity cost, in a two-good model, is the units of the other good given up to make one more unit of a good. As a rule: the opportunity cost of good A = units of good B given up ÷ units of good A gained.

Build the table one ratio at a time. Say each ratio out loud, with its units, before you divide.

Worked example — the opportunity-cost table. Use Dataset N (illustrative).

Northland's cloth. One worker-day makes 2 cloth or 4 wheat. To gain 2 cloth, Northland gives up 4 wheat. So one cloth costs 4 ÷ 2 = 2 wheat.
Southland's cloth. One worker-day makes 2 cloth or 6 wheat. So one cloth costs 6 ÷ 2 = 3 wheat.
Northland's wheat. Flip the question. To gain 4 wheat, Northland gives up 2 cloth. So one wheat costs 2 ÷ 4 = 0.5 cloth.
Southland's wheat. To gain 6 wheat, Southland gives up 2 cloth. So one wheat costs 2 ÷ 6 = 1⁄3 of a cloth.

Opportunity cost of one unit of each good (Dataset N, illustrative; costs in units of the other good)
Country	Cost of one cloth	Cost of one wheat
Northland	2 wheat	0.5 cloth
Southland	3 wheat	1⁄3 of a cloth

In words: in Northland a cloth costs 2 wheat and a wheat costs half a cloth; in Southland a cloth costs 3 wheat and a wheat costs a third of a cloth.

Notice that each country's two costs are flips of each other. Northland's 2 wheat per cloth turns into 0.5 cloth per wheat. That is a useful check on your table.

In practice (your tools). In Google Sheets, type each country's output in a row: the country name in column A, wheat per worker-day in column B, and cloth per worker-day in column C. In column D, type =B2/C2 for the cost of one cloth in wheat. In column E, type =C2/B2 for the cost of one wheat in cloth. Fill both formulas down one row. The two columns should match the table above, with Southland's wheat cost shown as a long decimal for one third.

Misconception check. Students often invert a ratio: they divide cloth by wheat when they meant the cost of cloth in wheat. That is tempting, because both numbers sit in the same row and a division looks the same either way. The cure is to say the units first. "The cost of one cloth, in wheat" means wheat goes on top: 4 ÷ 2 = 2 wheat per cloth. If your answer comes out as 0.5 wheat per cloth, you have the flipped ratio.

Memory hook: say the units first; the good you give up goes on top.

3. Find the comparative advantage: the lower cost decides

Now answer the puzzle from section 1. Think of a head chef who chops onions faster than a new line cook. Should the head chef do the chopping too? Each hour the chef spends chopping is an hour not spent planning the menu and running the kitchen. The line cook gives up much less to chop. So the line cook chops, and the whole kitchen gets more done.

Comparative advantage is the ability to produce a good at a lower opportunity cost, measured in units of the other good given up, than another producer can; it decides who should specialize in what.

Worked example — naming the comparative advantage. Read the opportunity-cost table one column at a time (Dataset N, illustrative).

Cloth. Northland's cloth costs 2 wheat; Southland's costs 3 wheat. Since 2 is less than 3, Northland has the comparative advantage in cloth.
Wheat. Northland's wheat costs 0.5 cloth; Southland's costs 1⁄3 of a cloth. Since 1⁄3 is less than 0.5, Southland has the comparative advantage in wheat.
The size of the gap in cloth. Southland gives up 3 wheat per cloth versus Northland's 2, a 1.5-fold difference, since 3 ÷ 2 = 1.5.

In words: Northland should make the cloth and Southland should make the wheat, because each one gives up less of the other good to make it.

Here is the week's punchline. Southland makes at least as much of each good per worker-day, yet it still gains by letting Northland make the cloth. Absolute advantage does not decide who specializes. Opportunity cost does.

Specialization is putting a country's or a person's resources into producing the good with the lower opportunity cost and getting other goods through trade.

Caveat: a country can have the comparative advantage in one good only. If Northland's cloth is cheaper in wheat, then Northland's wheat must be dearer in cloth. Two countries with different costs always split the two comparative advantages between them.

Misconception check. Students often hand the comparative advantage to whoever has the absolute advantage. That is tempting, because "better at it" sounds like it should mean "should do it." But Southland's absolute advantage in wheat and its tie in cloth say nothing about what each country gives up. Northland makes no more cloth than Southland, yet Northland's cloth costs only 2 wheat versus Southland's 3. The lower cost wins the assignment.

Pause and reflect — choose one. Pick either prompt; they count the same.

(a) Think of a group project or a shared household chore list. Who did a task they were not the fastest at, and why did that split still make sense?
(b) Think of a job you know, such as a shop, a clinic, or a restaurant. Name one task that the most skilled person there hands to someone else, and say what the skilled person gives up by doing it.

Memory hook: the cheaper cost picks the job, whoever is faster.

4. Set the price: the terms of trade and the mutually beneficial range

Specializing is only half the plan. Northland makes cloth and wants wheat, so it has to swap. How much wheat should one cloth buy?

Think of two neighbors trading garden produce. If one asks too much, the other grows it at home instead. A trade happens only at a price that beats what each side can do alone.

The terms of trade are the rate at which one good trades for another between two trading partners, such as the units of wheat paid for one unit of cloth.

Each country compares the price with its own opportunity cost. Northland sells cloth, and making a cloth costs it 2 wheat, so it wants more than 2 wheat for each one. Southland buys cloth, and making its own cloth would cost it 3 wheat, so it will pay less than 3 wheat for each one.

The mutually beneficial range is the span of possible terms of trade lying between the two trading partners' opportunity costs, inside which both sides get the good more cheaply than they could make it at home.

Worked example — testing the price. The illustrative terms are 2.5 wheat per cloth (Dataset N).

The range. The terms must sit between 2 and 3 wheat per cloth.
Is 2.5 inside? Yes: 2.5 is more than 2 and less than 3.
Northland's gain per cloth. It receives 2.5 wheat for a cloth that cost it 2 wheat, so it gains 2.5 − 2 = 0.5 wheat per cloth.
Southland's gain per cloth. It pays 2.5 wheat for a cloth that would cost it 3 wheat to make, so it saves 3 − 2.5 = 0.5 wheat per cloth.

In words: at 2.5 wheat per cloth, Northland gets half a wheat more than its own cost on every cloth it sells, and Southland pays half a wheat less than its own cost on every cloth it buys. Both sides come out ahead.

What about a price outside the range? At a price below 2 wheat per cloth, Northland would get less wheat for a cloth than it could make itself, so it would rather make both goods at home. At a price above 3, Southland would pay more for a cloth than its own cost, so it would rather make its own. A price exactly at 2 or at 3 leaves one side with no gain at all.

Limitation: this model sets the range but not the exact price. Where the price lands inside the range depends on bargaining and on how much of each good the two countries want, which the model leaves out.

Misconception check. Students often accept any price as a gain, because a trade happened, so both sides must have wanted it. That is tempting, but the model says otherwise. A price below 2 wheat per cloth gives Northland less than it could make on its own, and a price above 3 does the same to Southland. Check every price against both countries' opportunity costs. Only a price strictly between them is a gain for both.

Memory hook: the price must sit between the two costs.

5. Prove the gains from trade: a before-and-after table

Talk is cheap. To prove both countries gain, count the goods before trade and after it.

Gains from trade are the extra goods each trading partner ends up with when both specialize by comparative advantage and trade at terms inside the mutually beneficial range, compared with making everything at home.

Each illustrative country has 12 worker-days. Before trade, each splits its days between the two goods to feed its own people.

Worked example — before and after. Use Dataset N (illustrative).

Northland before trade. 8 worker-days on wheat give 8 × 4 = 32 wheat. The other 4 worker-days on cloth give 4 × 2 = 8 cloth.
Southland before trade. 6 worker-days on wheat give 6 × 6 = 36 wheat. The other 6 on cloth give 6 × 2 = 12 cloth.
Specialize. Northland puts all 12 worker-days on cloth: 12 × 2 = 24 cloth. Southland puts all 12 on wheat: 12 × 6 = 72 wheat.
Trade at 2.5 wheat per cloth. Northland sends 14 cloth and receives 14 × 2.5 = 35 wheat.
Northland after trade. 35 wheat and 24 − 14 = 10 cloth. That is a gain of 35 − 32 = 3 wheat and 10 − 8 = 2 cloth.
Southland after trade. 72 − 35 = 37 wheat and 14 cloth. That is a gain of 37 − 36 = 1 wheat and 14 − 12 = 2 cloth.
World output. Before trade: 32 + 36 = 68 wheat and 8 + 12 = 20 cloth. After specializing: 72 wheat and 24 cloth. That is a rise of 72 − 68 = 4 wheat and 24 − 20 = 4 cloth, from the same 12 + 12 = 24 worker-days.

What each country has before and after trade (Dataset N, illustrative; wheat and cloth in units)
Country	Before trade	After specializing and trading	Gain
Northland	32 wheat, 8 cloth	35 wheat, 10 cloth	3 wheat, 2 cloth
Southland	36 wheat, 12 cloth	37 wheat, 14 cloth	1 wheat, 2 cloth
World	68 wheat, 20 cloth	72 wheat, 24 cloth	4 wheat, 4 cloth

In words: both countries end with more of both goods, and the world makes 4 more wheat and 4 more cloth with no extra workers. The gain comes from moving each worker-day to the country that gives up less to use it.

Read the World row against the two country rows. Northland's 3 extra wheat plus Southland's 1 makes the world's 4. Northland's 2 extra cloth plus Southland's 2 makes the world's 4. The gains are not taken from anyone; they are new output.

That specialization raises total output is a positive result of the model. You can check it with arithmetic, and it holds whatever anyone values.

Honesty note: the model counts whole countries. Inside Northland, the farmers who used to grow wheat now have to make cloth instead, or find other work. The country gains, but that does not mean every person in it gains at first. Section 7 returns to this.

Misconception check. Students often think one country's gain must be the other's loss, as if the two were splitting a fixed pie. That is tempting, because a trade looks like a swap of things that already exist. But specialization makes the pie bigger first: world output rises from 68 wheat and 20 cloth to 72 and 24. Both countries can then take home a larger slice.

Memory hook: specialize, then swap: a bigger pie for both.

6. Read the trade balance calmly: a direction, not a defeat

Zoom out from wheat and cloth to a whole economy's books. A country sells goods abroad and buys goods from abroad. The difference between the two shows up in the news, often with a worried tone.

The trade balance is a country's exports minus its imports over a period, the same quantity as net exports; it is positive when exports are larger and negative when imports are larger.

In symbols, the trade balance is NX = X − IM, where X is exports and IM is imports. Imports are written IM, never M, because M is the money supply.

Worked example — the trade balance. Use the illustrative expenditure account from Week 2 (Dataset A, in billions of dollars).

Exports. X = 100.
Imports. IM = 150.
The balance. NX = X − IM = 100 − 150 = −50 billion dollars.

In words: imports exceeded exports by 50 billion dollars. That is a trade deficit.

A trade deficit is a negative trade balance: over the period, the country's imports exceeded its exports, which describes the direction of trade flows and is not by itself a loss of national income.

Why does a minus sign show up in GDP = C + I + G + NX? Go back to Week 2. Some of the spending counted in C, I, and G went to goods made abroad. Those goods were not produced here. Subtracting IM takes that foreign output back out of the count, so only domestic production is left. Subtracting imports does not erase anything that was made at home.

Look at Northland after trade, too. It sent 14 cloth and received 35 wheat. At 2.5 wheat per cloth, the 14 cloth are worth 14 × 2.5 = 35 wheat, so the two flows match in value. In this tiny model, trade balances. In a real economy it often does not, and next week shows where the money goes when it does not.

Misconception check. Students often read a trade deficit as money the country lost, like a business posting a loss. That is tempting, because "deficit" sounds like a bill nobody can pay. But the deficit in Dataset A describes the direction of trade flows: people here bought 50 billion dollars more from abroad than they sold abroad, and they got goods for it. A deficit by itself is not a loss of national income. Describe it as "imports exceeded exports by 50 billion dollars," and leave the verdict for the evidence.

Memory hook: a deficit is a direction, not a defeat.

7. Weigh tariffs and trade policy: both cases at full strength

So far the model has said what happens. Now comes a question about what a country should do, and here economists and citizens disagree.

Picture a town where a factory made one of the goods a trading partner now sells more cheaply. Shoppers across the country pay a little less. In that one town, the factory's workers lose their jobs at once. Both of those things are true together.

A tariff is a tax a government charges on imported goods, which raises their price at home and is one kind of trade barrier.
A trade barrier is any government policy that limits or raises the cost of trade with other countries, such as a tariff on imports.

Worked example — a barrier that stops the trade. Suppose Northland and Southland each put up a barrier high enough to stop their trade entirely (Dataset N, illustrative).

No trade means no specialization. Each country goes back to making both goods itself.
Northland. Back to 32 wheat and 8 cloth, down from 35 and 10.
Southland. Back to 36 wheat and 12 cloth, down from 37 and 14.
The world. World output falls back from 72 wheat and 24 cloth to 32 + 36 = 68 wheat and 8 + 12 = 20 cloth.

In words: a barrier high enough to stop the trade gives up the 4 extra wheat and 4 extra cloth that specialization made. That is the positive result. What it does not tell you is whether a smaller barrier, aimed at one industry, is worth its cost. That takes judgment.

Caveat: real tariffs rarely stop all trade. A smaller tariff raises the price of the taxed import at home and shrinks the trade rather than ending it. This course stays at the macro level and does not measure who gains and who loses in one market.

The case for freer trade, at full strength. Specialization by comparative advantage raises total output, as the table in section 5 proved. Trade lowers the prices people pay and widens the choice of goods in every store. The gains reach nearly every household, through lower prices for food, clothing, and tools. A country that blocks trade gives up output it could have had.

The case for protection, at full strength. The gains from trade are spread thin across many shoppers, but the costs land hard on particular industries, regions, and workers. A worker whose plant closes may not find an equal job nearby, and a whole town can lose its main employer. Some also argue for protection on strategic or national-security grounds: a country may want to keep the ability to make certain goods at home, even at a higher price, in case trade is cut off.

An adjustment cost is the loss borne by particular industries, regions, and workers when trade shifts production elsewhere, such as lost jobs, closed plants, and the time and expense of retraining or moving.

Now separate the two kinds of claims.

Positive and normative claims in the debate over trade policy
Claim	Kind	Which side leans on it
Specialization by comparative advantage raises total output.	Positive, a result of the model	Both accept it
A tariff raises the price of the taxed import at home.	Positive, a result of the model	Both accept it
Trade's gains are spread widely while its adjustment costs fall on particular workers and places.	Positive, a description of who bears what	Both accept it
Lower prices and wider choice for everyone are worth the cost to the industries that shrink.	Normative	Freer trade
Protecting particular jobs, towns, or strategic industries is worth higher prices for everyone.	Normative	Protection

Notice that the first three rows are not up for debate. The disagreement lives in the last two rows: how to weigh a widely shared gain against a concentrated loss, which is a question of values. This course gives you both cases and leaves the verdict to the evidence and your own values.

Misconception check. Students often decide the model settles the policy question, one way or the other. That is tempting, because the before-and-after table looks so clean. But the table answers a positive question: does specialization raise total output? It does. It cannot answer a normative one: is that gain worth the cost to the workers who must change jobs? A strong answer states the agreed result first, then each side's best case, then labels which parts are positive and which are normative.

Pause and reflect — choose one. Pick either prompt; they count the same.

(a) Write the strongest one-sentence case for freer trade, then the strongest one-sentence case for protection, and label the normative part of each.
(b) Think of an industry or a town you know. Name one group that would gain from freer trade and one that would bear an adjustment cost, and say which of your two sentences is positive and which is normative.

Memory hook: the model counts the pie; values decide how to share the cost.

Key terms

worker-day — One worker's labor for one day, used as the unit of resources when comparing what two countries can make with the same effort. (first used: 1. Meet two countries: who makes more?)
absolute advantage — The ability to produce more of a good than another producer can from the same resources, such as more units per worker-day. (first used: 1. Meet two countries: who makes more?)
comparative advantage — The ability to produce a good at a lower opportunity cost, measured in units of the other good given up, than another producer can; it decides who should specialize in what. (first used: 3. Find the comparative advantage: the lower cost decides)
specialization — Putting a country's or a person's resources into producing the good with the lower opportunity cost and getting other goods through trade. (first used: 3. Find the comparative advantage: the lower cost decides)
terms of trade — The rate at which one good trades for another between two trading partners, such as the units of wheat paid for one unit of cloth. (first used: 4. Set the price: the terms of trade and the mutually beneficial range)
mutually beneficial range — The span of possible terms of trade lying between the two trading partners' opportunity costs, inside which both sides get the good more cheaply than they could make it at home. (first used: 4. Set the price: the terms of trade and the mutually beneficial range)
gains from trade — The extra goods each trading partner ends up with when both specialize by comparative advantage and trade at terms inside the mutually beneficial range, compared with making everything at home. (first used: 5. Prove the gains from trade: a before-and-after table)
trade balance — A country's exports minus its imports over a period, the same quantity as net exports; it is positive when exports are larger and negative when imports are larger. (first used: 6. Read the trade balance calmly: a direction, not a defeat)
trade deficit — A negative trade balance: over the period, the country's imports exceeded its exports, which describes the direction of trade flows and is not by itself a loss of national income. (first used: 6. Read the trade balance calmly: a direction, not a defeat)
tariff — A tax a government charges on imported goods, which raises their price at home and is one kind of trade barrier. (first used: 7. Weigh tariffs and trade policy: both cases at full strength)
trade barrier — Any government policy that limits or raises the cost of trade with other countries, such as a tariff on imports. (first used: 7. Weigh tariffs and trade policy: both cases at full strength)
adjustment cost — The loss borne by particular industries, regions, and workers when trade shifts production elsewhere, such as lost jobs, closed plants, and the time and expense of retraining or moving. (first used: 7. Weigh tariffs and trade policy: both cases at full strength)

Summary

Absolute advantage means more output from the same resources.
Opportunity cost is the other good given up; the good you give up goes on top.
Comparative advantage is the lower opportunity cost, and it decides who specializes.
A country better at everything still gains by specializing where its cost is lowest.
Terms of trade inside the range between the two costs benefit both sides.
After specializing and trading, both countries can have more of both goods.
The trade balance is NX = X minus IM; a deficit means imports exceeded exports.
A trade deficit describes trade flows; by itself it is not a loss of income.
Freer trade and protection share the model; they differ on how to weigh who bears the cost.

Check your understanding

Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.

At an illustrative campus print shop (not real data), the first coworker can design 8 posters or print 4 banners in one hour, and the second coworker can design 3 posters or print 3 banners in one hour. Who has the absolute advantage in each task? Who has the comparative advantage in each?
Two illustrative towns (not real data) make boots and baskets. In Riverton one boot costs 4 baskets; in Hillport one boot costs 6 baskets. Which of these terms of trade benefit both towns: 3, 5, or 7 baskets per boot? Explain.
An illustrative coastal economy (not real data) exports 80 billion dollars of goods and services in a year and imports 95 billion dollars. Find its trade balance, say in words what it means, and describe it without the word "losing."
Sort each statement as positive or normative. (a) "Specializing raises total output." (b) "A tariff on bicycles raises their price at home." (c) "The government should protect bicycle jobs even if bicycles cost more."

Answers (worked reasoning — read after attempting)

The first coworker has the absolute advantage in both: 8 posters versus 3, and 4 banners versus 3. Now the opportunity costs. The first coworker's banner costs 8 ÷ 4 = 2 posters, and a poster costs 4 ÷ 8 = 0.5 banner. The second coworker's banner costs 3 ÷ 3 = 1 poster, and a poster costs 3 ÷ 3 = 1 banner. The second coworker's banner is cheaper (1 poster versus 2), so the second coworker has the comparative advantage in banners. The first coworker's poster is cheaper (0.5 banner versus 1), so the first coworker has the comparative advantage in posters. Being faster at both does not mean the first coworker should do both.
Only 5 baskets per boot benefits both. Riverton has the comparative advantage in boots, because its boot costs 4 baskets versus Hillport's 6. Riverton will sell a boot only for more than 4 baskets, and Hillport will pay less than 6, so the range is from 4 to 6. At 3, Riverton gets less than its own cost of 4. At 7, Hillport pays more than its own cost of 6. Only 5 sits inside the range.
The trade balance is NX = X − IM = 80 − 95 = −15 billion dollars. In words: over the year, imports exceeded exports by 15 billion dollars, a trade deficit. A neutral description says people in the economy bought 15 billion dollars more from abroad than they sold abroad. By itself, that is not a loss of national income.
Statement (a) is positive. It is a claim about what happens, and you can check it with a before-and-after table. Statement (b) is positive too, a testable claim about prices. Statement (c) is normative. The word "should" weighs one group's jobs against everyone's prices, which is a value judgment.

Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, and the quiz — and next week the exchange rate model shows what a stronger or weaker dollar does to exports and imports.

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