ECON101 Study Guide - Midterm Guide: Absolute Advantage, Comparative Advantage, Opportunity Cost
18 Feb 2017
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Chapter 3: interdependence and the gains from trade. One of the ten principles of economics from chapter 1: Trade is an exchange of goods and everyone gets something in return. Two countries: the u. s. and japan, two goods: computers and wheat, one resource: labor and measured in hours: imports- goods produced abroad and sold domestically, exports- goods produced domestically and sold abroad. Trade allows both countries involved to achieve greater prosperity as you can produce goods outside the ppf. Absolute advantage- the ability to produce a good using fewer inputs than another producer: input is labor hours in the example. The u. s. has an absolute advantage in the production of wheat: producing a ton of wheat uses 10 labour hours in the u. s. vs. 25 in japan. Comparative advantage: the driving force of specialization: who can produce more at a lower cost, opportunity cost and comparative advantage. Rather than just comparing inputs required, we can compare opportunity costs.
