C1: Specialization and Trade

Question 1

What is the difference between the microeconomic vs the macroeconomic perspective?

Answer 1

Microeconomics: looks at individuals and their interaction on markets
Macroeconomics: looks at an economy as a whole

Question 2

What is opportunity cost?

Answer 2

The opportunity cost of a choice is the utility of the best forgone alternative.

Question 3

What is an equilibrium?

Answer 3

A situation where individual’s choices are optimal (no one has an incentive to deviate) and feasible (mutually compatible)

Question 4

What is Pareto efficiency?

Answer 4

An allocation of resources is called Pareto efficient if no Pareto improvement is possible. A Pareto improvement is a reallocation that makes at least one agent better off while making no agent worse off.

Question 5

What is the Transformation Curve?

Answer 5

The Transformation Curve shows the region of feasible production of n different goods. The slope of the curve give the opportunity cost of producing more / less of a good.

Question 6

What is a absolute vs comparative advantage of an agent?

Answer 6

absolute: ability to produce a good using less resources
comparative: ability to produce a good at lower opportunity cost

Question 7

What is the principle of Comparative Advantage?

Answer 7

Specialization according to comparative advantages facilitates mutual gains from trade:

• even when one trading partner has an absolute advantage in the production of every good
• terms of trade must lie between the opportunity costs of the partners