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

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sapphiremouse562

24 Oct 2014

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Illustrate the trade-off between producing two goods. Assumption: 2 countries and 2 goods, trade, consume, price at which countries would trade for, quantities of each good produced by each countries. Export: goods produced domestically and sold aboard. Import: good produced aboard and sold domestically. Absolute advantage: the ability to produce a good using fewer input than another producer (measure the cost of good) Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer (gain from trade) Total production in all countries increase when a country specialize in a good. Opportunity cost of good #1(x-axis good) is the slope of ppf. If one country has comparative advantage in one good, then other country has comparative advantage in the second good. Interdependence and trade allow everyone to enjoy a greater quantity and variety of goods & services. Constricting the ppf (not in tb): in order produce good 1(x-axis good, for ex.

Related Questions

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

skybee160

1. The law of comparative advantage says that:

A. whoever has an absolute advantage in producing a good also has a comparative advantage in producing that good.

B. whoever has a comparative advantage in producing a good also has an absolute advantage in producing that good

C. the individual with the lowest opportunity cost of producing a particular good should produce it

D. comparative advantage exists only when one person has an absolute advantage in the production of two goods

2. A country has an absolute advantage in the production of a good if that country:

A. can produce good using fewer resources than another country would require

B. has the lowest opportunity cost of producing the good, regardless of whether it is produced with the fewest resources

C. has the greatest opportunity cost of producing the good, regardless of whether it is produced with the fewest resources

D. has the lowest opportunity cost of producing the good and can produce it with the fewest resources

3. A production possibilities frontier can shift outward for all of the following reasons except:

A. a larger workforce

B. a decrease in the size of the labor force

C. an increase in the skills of the labor force

D. an improvement in technology

byzantiumshark504

The law of comparative advantage states that:

a. each country should specialize in producing the good with the lowest opportunity cost.

b. a country that is able to produce something using fewer resources than other countries would gain from specialization and trade.

c. international trade barriers slow the introduction of new goods and better technologies.

d. countries can gain from trade if production is subject to economies of scale.

e. countries must agree on how much of one good exchanges for another.

turquoiseferret638

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

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