ECN 104 Lecture Notes - Lecture 3: Absolute Advantage, Comparative Advantage, Opportunity Cost

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roseplatypus79

13 Apr 2016

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Trade helps us gain a society and benefit from what goods and services we all have to offer each other. Trade creates a variety of products, so we"re not always stuck with the same goods and services. Absolute advantage: the comparison among producers of a good according to their productivity. Economist use the term absolute advantage when comparing the productivity of one person, firm, or nation to that of other. The producer that requires a smaller quantity of inputs to produce is said to have an absolute advantage in producing that good. Opportunity cost: what must be given up to obtain some item. Comparative advantage: the comparison among producers of a good according to their opportunity cost. Comparative advantage is used when describing the opportunity cost of two producers.

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Fill in the blanks. In case you get stuck, Iâve provided a list of all the missing words in alphabetical order at the end of the question. According to David Ricardoâs model, the pattern of trade between nations is determined by the distribution of ______________________ advantage. Unlike the ______________________ advantages described by Smith, Ricardoâs explanation allows for trade between partners in which one nation has superior ______________________ in the manufacture of all goods. Thatâs because Ricardoâs principle rests on the economic concept of ______________________ (defined as the amount of good Y that must be sacrificed when the nation produces a unit of good X) which can never be concentrated in just one nation. The model is usually specified with barter-style trade, meaning that we use ______________________ rather than ______________________ prices for the tradable goods. The price of each good on international markets must be higher than ______________________ in the exporting countries and lower than ______________________ in the importing countries. Although all parties can benefit from trade, there is no reason to think that they benefit equally. The ______________________ are derived from the difference between the opportunity costs of production in each nation and then distributed between participating nations according to the market price. As the price of a nationâs ______________________ good rises, it receives a larger share of the gains from trade, and we say that its ______________________ are appreciating. However, nations that ______________________ this good will receive a smaller share of the benefits from trade.

Absolute

Comparative

Export

Gains from trade

Import

Max WTP

Min WTA

Money

Opportunity cost

Productivity

Relative

Terms of trade

tansnake161

what is a key factor that determines a firm's profitability?

A differentiation of a firm's product from other products

B factors affecting a firm's entire market

C a firm's average cost of production relative to that of competing firms

D chance events

E all of the above

economic theory suggests countries benefit from international trade by producing more of those good and services for which they have a comparative advantage (and less of that for which a country does not have a comparative advantage). However, countries rarely specialize completely, why?

even with international trade, countries rarely specialize completely because

A, all goods and services can be traded internationally

B, some countries would lose as a result of free trade

C, consumers in different countries have homogeneous tastes

D, some countries do not have an absolute advantege producing anything

E, production of most goods involves increasing opportunity costs.

The principal concept behind comparative advantage is that a nation should

maximize its volume of trade with other nations.
use tariffs and quotas to protect the production of vital products for the nation.
concentrate production on those products for which it has the lowest domestic opportunity cost.
strive to be self-sufficient in the production of essential goods and services.

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ECN 104 Lecture Notes - Lecture 3: Absolute Advantage, Comparative Advantage, Opportunity Cost

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