Chapter 2 Production And trade.

Question 1

Efficiency

Answer 1

Getting maximum output per unit of input.

It can be applied to one business or to a whole nation.

Question 2

Production possibilities frontier (PPF)

Answer 2

Is an economic model of a nation’s production of goods.
-It allows for the production of only 2 goods, usually one representing government production and the other representing the private sector.

Question 3

What does the curve on the graph on PPF represent?

Answer 3

All possible combinations of both goods that can be produced if all the country’s resources are used as efficiently as possible.

Question 4

The opportunity cost of each good is measured by what

Answer 4

The quantity of one good that is given up to produce more of the other.

Question 5

What would happen if opportunity costs are constant

Answer 5

The PPF will be a straight line.

Question 6

Points inside the PPF are

Answer 6

Inefficient

Question 7

Points outside the PPF are

Answer 7

Are not attainable with the present resources and technology

Question 8

Points on the PPF are

Answer 8

Efficient

Question 9

When does economic growth occur?

Answer 9

When the potential maximum output of the economy increases.

This is shown on the PPF diagram by a rightward shift on the PPF curve.

Question 10

What do mercantilist believe?

Answer 10

That nations grow and develop by selling goods to other countries while not buying goods from them.
This increases the amount of money in the country available to create capital.

Question 11

Theory of Comparative Advantage

Answer 11

Originated with David Ricardo in early 1800’s.
It argues that countries should specialize in the production of goods that they are good at producing and trade with other nations that produce different goods.

Question 12

Theory of Comparative Advantage contends that

Answer 12

Both nations are made better off by specialization and trade, compared with mercantilism which argued that one country would be made better off at the expense of the other.

Question 13

Absolute advantage occurs when

Answer 13

One country is more efficient at the production of a particular good.

Question 14

Comparative advantage occurs when

Answer 14

We consider more than one good.
A country has a comparative advantage in the production of a good that it is relatively better producing compared to another country.

Question 15

Even if one country is absolutely better at producing all goods, each country will

Answer 15

Still have a relative advantage in at least one good.

Question 16

Trade

Answer 16

Trade does not allow countries to produce more, but it allows them to consume combinations of goods that would be unattainable without trade.

Question 17

Terms of trade

Answer 17

The rate at which one good trades for another.

Countries will only voluntarily agree to terms of trade that make it better off than it would be without trade.

Question 18

Observation of the real world supports the concept that

Answer 18

Specialization and trade leads to increased amounts of trade and higher and income for trading countries.

Question 19

If the opportunity costs of producing a good rise as a country produces more

Answer 19

It has increasing opportunity cost. This is represented by a curved PPF, concave to the origin.

Question 20

Inefficiency

Answer 20

-The condition where less than the maximum
output is produced with given resources and
technology.
Productive inefficiency implies that
more of one good can be produced without any
less of another good being produced.

Question 21

Economic growth

Answer 21

-Occurs when the maximum possible output of a country increases.

Question 22

Mercantilism

Answer 22

-The theory that a country should try to get and keep as much bullion as possible

Question 23

Classical economics

Answer 23

-argued against mercantilism and in favor of free trade between nations.

Question 24

Absolute advantage

Answer 24

-States that a particular individual or country can produce more of a specific good that another individual or country using the same amount of resources.
“Faster, more, more efficient”

Question 25

Specialization

Answer 25

-When people, businesses, regions, and/or nations concentrate on goods and services that they can produce better than anyone else. “Make what you do best, then trade for the rest.”

Question 26

Constant opportunity costs

Answer 26

-If opportunity costs are constant, then the production possibilities curve is negatively sloped straight line

Question 27

Increasing opportunity cost

Answer 27

-producing additional units of one good results in increasing amounts of lost output of the other good.