Chapter 2 - Specialization and Exchange

Question 1

Production Possibilities Frontier

Answer 1

a line or curve that show all the possible combinations of two outputs that can be produced using all available resources

Question 2

Production Possibility Model

Answer 2

• two groups: producers and consumers
• two goods being produced

model analyzes who produces which goods

Question 3

When are points efficient?

Answer 3

• points on the frontier are efficient, they obtain the most output possible from all available resources

Question 4

When are points inefficient?

Answer 4

points within (inside) the frontier are inefficient, they don’t use all the available resources

Question 5

What is absolute advantage?

Answer 5

the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.

• when they can produce more

Question 6

What is comparative advantage?

Answer 6

the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.

• when they don’t have to sacrifice as much?

Question 7

Why trade?

Answer 7

If each country SPECIALIZES by producing the good for which it has a comparative advantage, total production increases

Question 8

Gains from trade?

Answer 8

the improvement in outcomes that occurs when specialized producers exchange goods and services