ECON 1000 Chapter Notes - Chapter 3: Absolute Advantage, Comparative Advantage, Opportunity Cost

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17 May 2018

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ECON 1000

CHAPTER3- INTERDEPENDENCR AND THE GAINS FROM TRADE

Parable for the modern economy

If there are 2 people, and each can only produce 1 thing (different from the other), it is clear

that they can benefit from trade so that they can both get a taste of the other. But, if they can

both produce both things, but one is better at one thing and the other at the other, then it

makes sense for them to each specialize and trade.

Production Possibilities.

Suppose one person is more productive in BOTH areas. For example: Frank all 8 hiurs in

potatoes= 32kg and 8 hours in meat=8kg. 4 hours of potatoes=16kg and 4 hours in meat =4kg.

This gives a straight line

Rose:

8 hours in potatoes= 48kg

8 hours of meat= 24kg

4 hours of potatoes= 24kg

4 hours of meat= 12kg

Suppose they do not trade, then the production possibilities frontier is also the consumption

possibilities frontier.

Specialization and trade

Make a deal.

Rose says that each should specialize.

Frank will grow potatoes 8 hours a day and he is to give 15kg of his 32kg of potatoes to Rose,

and Rose will give him 5kg of meath in return.

So he would be getting 17kg of potatoes and 5kg of meat, instead of the 16kg of potatoes and

the 4kg of meat he did before.

Absolute advantage

Absolute advantage when comparing the productivity of one person, firm, or nation to that of

another. The producer that requires a smaller quantity of inputs to produce a good is said to

have an absolute advantage in producing that good. Rose has an absolute advantage both in

producing meat and in producing potatoes because she requires less time than Frank.

Opportunity cost and comparative advantage

Rather than comparing inputs required, we can compare the opportunity costs. Opportunity

cost of some item is what we give up to get that item. Time spent producing potatoes,

therefore, takes away from time available for producing meat.

Rose’s opportuity ost of produig 1kg of potatoes is 0.5kg of meat, and 1kg of meat costs 2

potatoes

Franks opportunity cost of 1kg of potatoes is 0.25kg of meat, and 1 kg of meat, costs 4 kg of

potatoes

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Document Summary

If there are 2 people, and each can only produce 1 thing (different from the other), it is clear that they can benefit from trade so that they can both get a taste of the other. But, if they can both produce both things, but one is better at one thing and the other at the other, then it makes sense for them to each specialize and trade. Suppose one person is more productive in both areas. For example: frank all 8 hiurs in potatoes= 32kg and 8 hours in meat=8kg. 4 hours of potatoes=16kg and 4 hours in meat =4kg. Suppose they do not trade, then the production possibilities frontier is also the consumption possibilities frontier. Frank will grow potatoes 8 hours a day and he is to give 15kg of his 32kg of potatoes to rose, and rose will give him 5kg of meath in return.

Related Questions

The following are production possibilities tables for Germany and Canada. Note that we are assuming that opportunity costs remain constant along the production possibilities frontier and that each country produces only these two products. Use the information in the tables to answer subsequent questions.

Germany's Production Possibilities Table

	Production Alternatives
Product	A	B	C	D
Autos	0	40	80	120
Computers	60	40	20	0

Canada's Production Possibilities Table

	Production Alternatives
Product	A'	B'	C'	D'
Autos	0	60	120	180
Computers	120	80	40	0

a.) Since Canada can produce more of either product than Germany can, is there any reason for Canada and Germany to engage in trade? Explain.

b.) If they trade, which country should specialize in which product and why?

c.) If the Germans are consuming and producing 40 autos and 40 computers before the trade and the Canadians are producing and consuming 60 autos and 80 computers before the trade, what are the potential gains from trade (if any) in terms of additional production of autos and computers for both countries combined?

crimsonweasel447

(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

A bowed out PPF reflects which of the following ideas?

i.increasing opportunity cost

ii. resources are not equally productive in all activities

iii. prices of goods increase over time

		I only
		I and iii
		ii and iii
		I and ii

1 point

QUESTION 2

With no international trade, a country ________ consume at a point outside of its PPF; with international trade, a country ________ consume at a point outside of its PPF.

		can; cannot
		cannot; can
		cannot; cannot
		can; can

1 point

QUESTION 3

If the production possibilities frontier between two goods is a straight line, then the

		the line does not qualify as a production possibilities frontier because the unattainable production points are too close to the inefficient production points.
		opportunity cost is not a ratio.
		increasing opportunity costs.
		resources are equally productive in both goods.

1 point

QUESTION 4

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

		It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		It decreases.
		It increases.
		It remains constant.

1 point

QUESTION 5

"Comparative advantage" is defined as a situation in which one person can produce

		more of a good than another person.
		a good for a lower dollar cost than another person.
		a good for a lower opportunity cost than another person.
		more of all goods than another person.

1 point

QUESTION 6

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

		increases.
		decreases.
		might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		remains constant.

1 point

QUESTION 7

A bowed out production possibility frontier shows that the

		opportunity cost relationship is linear.
		the opportunity cost of a good is constant as more of the good is produced.
		the opportunity cost of a good increase as more of the good is produced.
		the opportunity cost of a good decrease as more of the good is produced.

1 point

QUESTION 8

Which of the following statements is correct?

		The production possibilities frontier shows that there are no limits to production.
		Any point on or within the PPF is production efficient.
		If capital is idle, the economy is producing at its full potential.
		A tradeoff is a limit that forces an exchange or a substitution of one thing for something else.

1 point

QUESTION 9

A major earthquake occurs in the central part of the United States. What impact would this have on the nation's production possibilities frontier and why?

		A tradeoff would occur to replace the resources and goods destroyed.
		It would shift inward because some of the nation's resources, such as capital and labor, would be destroyed.
		It would shift outward because unemployment would be reduced.
		Nothing would happen because the nation would still have the same capabilities.

1 point

QUESTION 10

When a nation is producing on its production possibilities frontier, if more resources are used to produce one good, then the production of other goods

		must increase.
		must decrease.
		must remain the same.
		must change but they might increase or decrease.

1 point

QUESTION 11

Moving along a country's PPF, a reasonable opportunity costs increase is that

		unemployment increases as a country produce more and more of one good.
		unemployment decreases as a country produces more and more of one good.
		some resources are better suited for producing one good rather than the other.
		technology declines as a country produce more and more of one good.

1 point

QUESTION 12

A reason the production possibilities frontier exists is

		scarcity of resources and unlimited technology.
		unemployment.
		scarcity of resources.
		unlimited resources and technology.

1 point

QUESTION 13

Moving from one point to another on a production possibilities frontier implies

		increasing the production of one good and decreasing the production of another.
		increasing the production of both goods.
		decreasing the production of both goods.
		holding the production levels of both goods constant.

1 point

QUESTION 14

Specialization and trade make a country better off because with trade the country can consume at a point

		outside its production possibilities frontier.
		on its trading partner's production possibilities frontier.
		inside its production possibilities frontier.
		on its production possibilities frontier.

1 point

QUESTION 15

The production possibilities frontier is the

		the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced when technology is changing.
		the minimum output that can be produced when resources are used inefficiently.
		the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology.
		maximum output that can be produced at an opportunity cost of zero.

1 point

QUESTION 16

The opportunity cost of economic growth is ________ and the benefit of economic growth is ________.

		decreased current consumption; decreased future consumption
		decreased current consumption; increased future consumption
		increased current consumption; increased future consumption
		increased current consumption; decreased future consumption

1 point

QUESTION 17

In terms of a nation's production possibilities frontier, what impact does international trade have?

		International trade shifts the nation's production possibilities frontier outward.
		International trade shifts the production possibilities frontier outward for the goods that are exported and inward for the goods that are imported.
		International trade shifts the nation's production possibilities frontier inward.
		International trade allows the nation to consume at a point outside its production possibilities frontier.

1 point

QUESTION 18

The production possibilities frontier illustrates the

		goods and services that people want.
		limits to people's wants.
		resources the economy possesses, but not it is the level of technology.
		maximum combinations of goods and services that can be produced.

1 point

QUESTION 19

As we move along the production possibilities frontier,

		the possibilities of tradeoffs diminish.
		the production of one good increases as the production of the other good decreases.
		more of both goods can be produced.
		a tradeoff is not possible because nations need all goods.

1 point

QUESTION 20

What is the opportunity cost of economic growth?

		Eliminate scarcity
		Land.
		Capital goods.
		Consumption of goods.

1 point

QUESTION 21

Which of the following statements is correct?

i.As the economy grows, the opportunity costs of economic growth decrease.

ii. Economic growth has no opportunity cost.

iii. The opportunity cost of economic growth is current consumption forgone.

		ii only
		iii only
		I only
		I and iii

1 point

QUESTION 22

Does economic growth depend upon which of the following?

i. Increasing the quantity of labor.

ii. Lowering the prices of goods and services.

iii. Advancing technology.

		ii only.
		I only.
		I and iii.
		iii only.

1 point

QUESTION 23

When drawing a production possibilities frontier, which of the following is held constant?

		the amount of money in the economy
		the prices of goods and services
		the quantity of the goods and services that are produced
		the available factors of production and the state of technology

1 point

QUESTION 24

To increase its economic growth, a nation should

		encourage spending on goods and services.
		increase in current consumption.
		encourage education because that increases the quality of labor.
		limit the number of people in college because they produce nothing.

1 point

QUESTION 25

The opportunity cost of one more slice of pizza in terms of sodas is the

		some pizza slices we have to give up to get one extra soda.
		the total number of sodas that we have divided by the total number of pizza slices that we have.
		the total number of pizza slices that we have divided by the total number of sodas that we have.
		the number of sodas we have to give up to get one extra pizza slice.

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ECON 1000 Chapter Notes - Chapter 3: Absolute Advantage, Comparative Advantage, Opportunity Cost

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