Chapter 3 - Trade Flashcards
What is economic interdependence?
Economic interdependence is the reliance of people and countries on goods and services provided by others. It arises because of specialization and trade, allowing for greater efficiency and a higher standard of living.
Why do people choose to become economically interdependent?
People become interdependent because trade allows them to specialize in what they do best and obtain other goods and services more efficiently, improving overall quality of life.
What is the main principle related to trade mentioned in Chapter 3?
One of the Ten Principles of Economics states that trade can make everyone better off, as it allows for specialization and exchange that increase the overall efficiency and wealth of an economy.
Describe the concept of the Production Possibilities Frontier (PPF).
The PPF is a curve that shows the various combinations of two goods that an economy can produce using all its resources efficiently. It illustrates the trade-offs between different production options.
What does the term “self-sufficiency” mean in the context of trade?
Self-sufficiency refers to a situation where individuals or nations produce everything they consume. However, trade often allows for more efficient production and a greater variety of goods than self-sufficiency.
What is absolute advantage?
Absolute advantage occurs when a producer can produce more of a good using fewer resources than another producer. For example, Rose has an absolute advantage over Frank in producing both meat and potatoes.
How does opportunity cost relate to trade?
Opportunity cost is what is given up to obtain something else. In trade, producers specialize in the goods for which they have a lower opportunity cost, maximizing efficiency and gains from trade.
What is comparative advantage?
Comparative advantage is when a producer has a lower opportunity cost of producing a good compared to another. Even if one person or country has an absolute advantage in all goods, both parties can benefit from trade if they specialize based on comparative advantage.
Why is it impossible for one person to have a comparative advantage in both goods?
Comparative advantage is based on opportunity cost. If one good’s opportunity cost is low, the other must be high. Therefore, a person cannot have a comparative advantage in both goods.
What determines the price at which trade occurs?
The price of trade must lie between the two trading parties’ opportunity costs for both to benefit. This ensures that each party gets a good deal compared to producing the good themselves.
What is the principle of comparative advantage’s significance in international trade?
The principle explains why countries benefit from specializing in goods they produce most efficiently and trading for others. It increases global production and allows countries to enjoy a greater variety of goods.
