ECON 1BB3 Chapter Notes - Chapter 17: Comparative Advantage, Absolute Advantage, Opportunity Cost

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beigeelephant243

15 Sep 2016

School

McMaster University

Department

Economics

Course

ECON 1BB3

Professor

Bridget O' Shaughnessy

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ECON 1BB3 Full Course Notes

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As long as the opportunity cost of production differs between two countries, there are gains from specialization and trade. Each country should specialize in producing the good with the lower opportunity cost. Terms of trade: agreed upon terms between countries that specify how much of one good exchanges for another. Even if one country has an absolute advantage in both goods, difference in the opportunity cost of production between the two countries ensure that specialization and exchange result in mutual gain. Comparative advantage creates gain from specialization and trade, not absolute advantage. For each good, world production = world consumption. Specialization based on the law of comparative advantage still leads to gains from trade. Example of a 2x2 trade model: sentence: thor can produce 400 hammers or 100 arrows in a week. Hawkeye can produce 200 hammers of 300 arrows in a week. Each work 40 hours in one week: diagrams: ppf, tables:

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

215. Economists examine pollution from the perspective of the:
A) preferences of people.
B) intensity and duration of the harm to resources.
C) desires of government bureaucrats.
D) intent of business firms in the maximization of profits.

212. Free trade is beneficial because it:
A) reduces competition.
B) leads to less use of the world's resources.
C) results in a wider array of consumer products.
D) leads to the production of free goods.

206. If a country has a comparative advantage in the production of a good:
A) it can produce that good at a lower opportunity cost.
B) it will find trade most beneficial when it trades with another country that has a comparative advantage in the same good.
C) it will not find trade beneficial because other countries won't have a comparative advantage in other goods.
D) it must also have an absolute advantage in the good.

203. Which of the following statements is true?
A) Nations have generally moved toward freer international trade policies over the past few decades.
B) Nations all over the world have recently raised trade barriers.
C) Eastern Europe and the Former Soviet Union countries have reduced trade in the last decade.
D) NAFTA lowered trade barriers between the United States and Mexico but raised them between the United States and Canada.

olivebuffalo87

ECON 1BB3 Chapter Notes - Chapter 17: Comparative Advantage, Absolute Advantage, Opportunity Cost

ECON 1BB3 Full Course Notes

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