ECON 1000 Lecture Notes - Lecture 7: Opportunity Cost, Comparative Advantage

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greyplatypus391

15 Mar 2016

School

Northeastern University

Department

Economics

Course

ECON 1000

Professor

carolinavaliente

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Document Summary

Absolute advantage: the ability to produce a good using fewer inputs than another producer. Opportunity cost: whatever must be given up to obtain some item. Comparative advantage: the ability to produce good at a lower opportunity cost than another producer, reflects the relative opportunity cost. Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage. For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs. David ricardo"s theory is the starting point of modern international economics. Imports: goods produced abroad and sold domestically. Exports: goods produced domestically and sold abroad. Slope on graphs is equivalent to opportunity cost. Ex: daniel produces 30 pizzas or 100 bread in 8 hrs. David produces 50 pizzas or 400 bread in 8 hrs. Daniel- for 1 pizza the opportunity cost is 10/3 breads and for 1 bread it is 3/10 pizzas.

Related Questions

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

(1) Implicit costs are the opportunity costs of using the resources of ---------------------------------------------

a. outsiders.

b. banks.

c. retained earnings.

d. owners.

(2) The Principle of Comparative Advantage implies that:

a. Two countries can benefit from trade only if one country is better at producing a good compared to another in absolute terms.

b. Two countries can benefit from specialization and trade even if one country is better at one good compared to another in absolute terms.

c. all countries should specialize in whatever they have a higher opportunity cost to producing.

d. all countries are better off when each produces all goods for themselves and they do not trade with each other.

(3) Points inside a production possibilities frontier represent

a. unemployment of resources

b. unattainable production combinations

c. efficient use of resources

d. supply exceeds demand

(4) In a free market --------------------------------

a. governments intervene

b. governments plan production

c. governments interfere

d. prices adjust to reconcile scarcity and desires

crimsonmarten898

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

ECON 1000 Lecture Notes - Lecture 7: Opportunity Cost, Comparative Advantage

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