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Microecon Chap 3
Interdependence and the Gains from Trade
| Question | Answer |
|---|---|
| What is absolute advantage? | The ability to produce a good using fewer inputs than another producer. |
| What is opportunity cost? | Whatever must be given up obtaining some item and is used to measure the trade-off between the two goods that each producer faces. |
| What is comparative advantage? | The ability to produce a good at a lower opportunity cost than another producer and reflects the relative opportunity cost. |
| What is the principle of comparative advantage? | Each good should be produced by the individual that has the smaller opportunity cost of producing that good (specialization). |
| Can one person have a comparative advantage in both goods. | No, one person cannot have a comparative advantage in both goods, but one person can have an absolute advantage in both goods. |
| What is the relationship between opportunity costs and goods? | The opportunity cost of one good inverse the opportunity cost of the other good. |
| How do specialization and trade impact economies according to comparative advantage? | Specialization and trade can increase the total production in an economy which increases the size of the economic pie aiming everyone better off. |
| How is the price of trade determined? | The price of trade must lie between the two opportunity costs. |
| What does the principle of comparative advantage explain? | It explains interdependence and the gains from trade. |
| What are imports? | Goods produced abroad and sold domestically. |
| What are exports? | Goods produced domestically and sold abroad. |
Created by:
angry
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