Chapter 3: Interdependence and the Gains from Trade

Question 1

Define ‘Absolute advantage’.

Answer 1

The comparison among producers of a good according to their productivity.

Question 2

Define ‘Opportunity cost’.

Answer 2

Whatever must be given up to obtain some item.

Question 3

Define ‘Comparative advantage’.

Answer 3

The comparison among producers of a good according to their opportunity cost.

Question 4

Define ‘Imports’.

Answer 4

Goods and services produced abroad and sold domestically.

Question 5

Define ‘Exports’.

Answer 5

Goods and services produced domestically and sold abroad.

Question 6

What are the two ways to compare the ability of two people in producing a good?

Answer 6

1. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage at producing the good.
2. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage.

Question 7

The gains from trade are based on ___ advantage.

Answer 7

Comparative.

Question 8

Trade makes everyone better off because it allows people to ___ in those activities in which they have a comparative advantage.

Answer 8

Specialize.

Question 9

Economists use the principle of comparative advantage to advocate ___ ___ among countries.

Answer 9

Free trade.