Chapter 3

Question 1

Starrett’s spatial impossibility theorem (1978):

Answer 1

People and firms are not all at the same place, or: Exchange = trade

With transport costs and without indivisibilities trade is impossible

Any trade can be avoided by local production

Backyard capitalism

No exchange

Question 2

Absolute advantage

Answer 2

One person has an absolute advantage over another if an hour spent in performing a task earns more than the other person can earn in an hour at the same task.

Question 3

Comparative advantage

Answer 3

One person has a comparative advantage over another in a task if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost of performing the same task.

Question 4

Sources individual level (micro)

Answer 4

Inborn talent, education, training, experience

Question 5

Sources national level (macro)

Answer 5

Land, labour, capital, entrepreneurship, knowledge, natural resources, cultural, legal and political institutions

Question 6

Krugman (1979)

Answer 6

“trading cars for cars” beause of economies of scale: firms produce cheaper at larger
amounts

Also trade with identical technologies and no comparative advantage!

Question 7

The Production Possibilities Curve

Answer 7

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.

Question 8

Attainable point

Answer 8

Any combination of goods that can be produced using currently available resources

Question 9

Unattainable point

Answer 9

Any combination of goods that can be produced using currently available resources

Question 10

Inefficient point

Answer 10

Any combination of goods that can be produced using currently available resources enable an increase in the production of one good w/o a reduction in the production of the other

Question 11

Efficient point

Answer 11

Any combination of goods that can be produced using currently available resources do not allow an increase in the production of one good w/o reduction in the production of the other

Question 12

Comparative Advantage and the Gains from International Trade

Answer 12

When countries specializes according to the comparative advantage, and trade accordingly, both can consume at levels in excess of what would be possible if there were no trade.

Question 13

Some factors that may limit specialisation:

Answer 13

Low population density

Isolation

Size of the market

Once you’re behind, you stay behind?

Developing countries do not want to have comparative advantage in raw materials and
agriculture for ever

Developing strategies aimed at changing the comparative advantage

Question 14

Factors that Shift the Economy’s PPF

Answer 14

Increases in productive resources or improvements in knowledge and technology cause the PPF to shift outwards. They are the main factors that drive economic growth.