ECON 1100 Chapter Notes - Chapter 2: Market Economy, Comparative Advantage, Opportunity Cost
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7 Dec 2013
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Gains from exchange are possible if trading partners have comparative advantage in producing different goods and services. Absolute advantage: the advantage of taking fewer hours to preform a task than another person does (can produce more of a good) Comparative advantage: the advantage of having a lower opportunity cost of preforming a task than another person does for the same task (more efficient at producing good aka lower opportunity cost) The model of comparative advantage predicts that output can be increased if each person specialized in the task, which they are relatively more efficient in; based on multiple assumptions. Ppc curve slope tells us the opportunity cost of producing an additional unit of the good measured along the horizontal axis. The principle of increasing o. c. tells us that the slope of the ppc becomes steeper as we move downward to the right. Economic growth can be represented by an outward shift of the ppc.
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(Table: Production Possibilities for the U.S. and Great Britain) The table shows production possibilities for the United States and Great Britain, assuming that both countries could choose to devote all resources to producing either good. Which statement is correct with regard to the information in the table? |
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a. The U.S. has a comparative advantage in producing music CDs because it can produce more music CDs than anything else. b. These countries should not engage in trade with one another, because the transportation costs of these goods are too high. c. To determine which country has a comparative advantage in either good, we would need to know the monetary measure of production costs for both countries. d.Ā The U.S. has a comparative advantage in producing athletic shoes because it can do so at a lower opportunity cost. |
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