Economic Concepts Review

Question 1

What are the key principles that make trade beneficial?

Answer 1

• Division of Labor & Specialization:
  – Society focuses on different economic activities, improving efficiency and productivity.
  Requires access to large markets.
• Comparative Advantage:
  – A nation benefits by specializing in what it produces most efficiently.
  Absolute Advantage: The ability to produce something better than others.

Question 2

Why is trade beneficial for a country?

Answer 2

• Exports goods produced most efficiently, imports those produced less efficiently.
• Focuses resources on efficient production, preventing waste and generating more wealth.
• Example: British Cloth & Portuguese Wine
  – Portugal excels in wine and cloth; Britain excels only in cloth.

Question 3

How does comparative advantage enhance trade?

Answer 3

• Each country produces what it does most efficiently, avoiding opportunity costs.
• Example:
  – Britain: Higher opportunity cost for wine production.
  – Portugal: Lower opportunity cost for wine production.

Question 4

What does trade achieve under comparative advantage?

Answer 4

• Global production is maximized.
• Results in more goods for everyone (e.g., more cloth and wine).

Question 5

What is the effect of free trade on a country’s economy?

Answer 5

• Increases imports and exports based on comparative advantage.
• Boosts efficiency and reduces waste, benefiting consumers and producers.

Question 6

What happens when a tariff is imposed?

Answer 6

• Tariff increases the price of imports.
• Reduces consumer surplus and creates government revenue but causes deadweight loss.

Question 7

What are the two key qualities of public goods?

Answer 7

• Nonexcludable: Cannot prevent others from consuming.
• Nonrival: One person’s consumption doesn’t hinder others

Question 8

Examples of public goods?

Answer 8

National defense.
Clean air and water.
Roads, bridges, and free trade.

Question 9

What is the “Free Rider Problem”?

Answer 9

• Individuals consume public goods without contributing.
• Common in collective action scenarios, where group size increases free riding incentives.

Question 10

Why do collective action problems occur?

Answer 10

• Individuals benefit from public goods without contributing.
• Larger group size increases incentives to free ride.

Question 11

What factors reduce free riding in group projects?

Answer 11

Smaller groups (higher individual accountability).
Strong individual incentives (e.g., one person aiming for Harvard Law).