Exam 1- Chapter 2 Production And Trade

Question 1

The key to a global economy , according to modern economists,

Answer 1

Is free trade

Question 2

Efficiency

Answer 2

Efficiency is getting the maximum output per unit of input.

Efficiency can be applied to one business or to a whole nation.

Question 3

Production possibilities frontier PPF

Answer 3

The production possibilities frontier is an economic model of a nation’s production of goods. It allows for the production of only two goods, usually one representing in government production and the other representing in the private sector.

Question 4

What does the curve on the PPF graph represent?

Answer 4

All possible combinations of both goods that can be produced if all the country’s resources are used as efficiently as possible.

Question 5

What is the opportunity cost of each good measured by?

Answer 5

The opportunity cost of each good is measured by the quantity of one good that is given up to produce more of the other.

Question 6

If opportunity costs are constant

Answer 6

The production possibilities frontier will be a straight line.

Question 7

Points inside the PPF are

Answer 7

Inefficient

Question 8

Points on the PPF are

Answer 8

Efficient

Question 9

Points outside the PPF are

Answer 9

Not attainable with the present resources and technology.

Question 10

When does economic growth occur

Answer 10

Economic growth occurs when the potential maximum output of the economy increases. This is shown on the PPF diagram by a rightward shift of the PPF curve.

Question 11

What do mercantilists believe ?

Answer 11

They believe that nations grow and develop by selling goods to other countries while not buying goods from them. This increases the amount of money in the country available to create capital.

Question 12

Theory of Comparative advantage

Answer 12

This theory originated with David Ricardo in the early 1800s. It argues that countries should specialize in the production of goods that they are good at producing and trade with other nations that produce different goods.

Question 13

The theory of comparative advantage contends that

Answer 13

Both Nations are made better off by specialization and trade, compared with mercantilism which argued that one country would be made better off at the expense of the other.

Question 14

When does absolute advantage occur?

Answer 14

Absolute advantage occurs when one country is more efficient at the production of a particular good.

Question 15

When does comparative advantage occur?

Answer 15

• Comparative advantage occurs when we consider more than one good.
• A country has a comparative advantage in the production of a good that it is relatively better at producing compared to another country.
• Even if one country is absolutely better at producing all goods, each country will still have a relative advantage in at least one good.

Question 16

Trade

Answer 16

Trade does not allow other countries to produce more, but it allows them to consume combinations of goods that would be unattainable without trade

Question 17

Terms of trade

Answer 17

The rate at which one good trades for another is called the terms of trade.
Countries will only voluntarily agree to terms of trade that make it better off than it would be without trade.

Question 18

Observation of the real world supports the concept that

Answer 18

Specialization and trade leads to increased amounts of trade and higher incomes for trading countries.

Question 19

If the opportunity costs of producing a good rise as a country produces more

Answer 19

It has increasing opportunity costs. This is represented by a curved PPF, concave to the origin.

Question 20

When will the well being of the world be maximized

Answer 20

When each country must be able to sell the goods and services it produces in other countries, and must be able to buy goods and services from other countries. It must be able to make these transactions at fair prices and without undue restrictions placed on it.

Question 21

People go into business to make

Answer 21

Profit

Question 22

To maximize the profits

Answer 22

The firm should maximize its costs, ceteris paribus.

Question 23

The costs of the firm are

Answer 23

The payments to resources it employs, namely labor, capital, and natural resources.

Question 24

The business that best maximizes cost

Answer 24

Will be the one that gets the most production( output) from its resources.

Question 25

Efficient

Answer 25

An efficient business in economists terms is one that gets the maximum possible output per unit of input ( resource) it employs.

Question 26

No business or country is actually efficient in the strict sense.

Answer 26

True. Because there is always more output that can theoretically be obtained from our resources than we actually get

Question 27

We can evaluate efficiency by

Answer 27

Comparing two businesses or two countries, and determine which is more efficient than the other, or by looking at the country or business overtime and seeing if it becomes more or less efficient.

Question 28

Profit comes from

Answer 28

Cost and revenue

Question 29

Production possibilities frontier

Answer 29

It shows as the meaning and consequences of efficiency on a national scale. The PPF is based on the assumption that a country produces only two goods.

Question 30

If the economy is operating at maximum efficiency, to get more of one good

Answer 30

We must give up production of the other.

Question 31

Inefficient

Answer 31

It means that we are either not using all of our resources, not using them as well as possible, or both.

Question 32

Economic growth occurs

Answer 32

When the maximum possible Output of a country increases

Question 33

Economic growth can occur because

Answer 33

More resources are made available or

technology makes the existing resources able to produce more.

Question 34

The PPF will move inward and a country’s potential output will decrease

Answer 34

Following major natural disasters or major economic collapses that undermine the foundation of the economy.

Question 35

It is important to note that the PPF curve

Answer 35

Is potential output, not the actual output produced. Every country is always below its potential.

Question 36

So far production possibilities analysis has been limited

Answer 36

To One country operating in isolation.

Question 37

What are the two basic theories of international trade

Answer 37

Mercantilism 1300s

Theory of comparative advantage 1700-1800

Question 38

Mercantilism

Answer 38

Believes that a country will grow stronger every time it sells a good to another country, and weaker every time it buys one from overseas.

Question 39

To a mercantilist, trade always results

Answer 39

In a winner and a loser.
The seller wins and the buyer loses, because the seller ends up with the gold.
Economists call this a zero sum game, since the gains of one country equal the losses of the other, and if the gains and losses are summed together, the result is zero.

Question 40

Mercantilism does not work if

Answer 40

Everyone tries to follow it. If all nations passed laws banning imports, there will be no exports as well.

Question 41

Classical economists

Answer 41

Argued against mercantilism and in favor of free trade between nations.

Question 42

Adam Smith

Answer 42

Author of The Wealth of Nations 1776

Question 43

David Ricardo

Answer 43

Author of Principles of Political Economy and Taxation 1815

Question 44

Classical economics argues

Answer 44

That a trade makes both parties to the trade better off

Question 45

A mercantilist viewed grade from the perspective of the

Answer 45

State

Question 46

A classical views trade from the perspective of

Answer 46

Individuals involved in the trade, and then expands this view to look at the effects on the state.

Question 47

Classical theory says that to make your country strong you should

Answer 47

Determine which goods you are good at producing and specialize in the production of those goods .
Trade as freely as possible with other nations.

Question 48

To the classical economics

Answer 48

Trade makes both countries better off

Question 49

-Better

Answer 49

Better means that the cost of producing the identical goods is lower

Question 50

Comparative advantage

Answer 50

It means advantage in comparison.
We are better at everything, we are more better than you at some things, and the most better than you at 1 thing. We find that one thing and specialize in it to both of our advantages.

Question 51

Trade does not allow nations to increase their production possibilities,

Answer 51

It allows them to consume more than they are able to produce.

Question 52

To obtain the gains from trade

Answer 52

Countries must specialize in the production of a good or goods

Question 53

Terms of trade

Answer 53

The rate at which two goods trade for each other is called the terms of trade

Question 54

Comparative advantage

Answer 54

Is that good that, compared to the other country, you are the best at producing.