exam 1 chapter2: Flashcards
In what scenario does trading make people better off?
Trades make people better off when their preferences differ.
what do specialization and the division of knowledge do for trade?
it improves one’s ability to trade, via increased productivity.
How does trade increase productivity?
Comparative advantage.
It is best to trade an item to someone who values’s it (more/less) than you?
more than you.
What does a trade-off refer to?
- people have different preferences and it helps stimulate the world of trade.
(T/F) we can produce less through trade than by individual production?
False, we can produce more through trade.
- This is a postulate of specialization.
What is the idea of Divison of knowledge without specialization?
Without specialization, each person produces their own food, clothing, so on.
- essentially the combined knowledge of our society isn’t much more than that of a single person.
What is the idea of Divison of knowledge with specialization?
- With, specialization, much more knowledge is used than could exist in a single brain.
- Knowledge increases productivity so specialization increases total output.
” focus on your strengths”
T/F trade takes advantage of our differences?
True, countries have differing climates, levels of human capital, and so on. Some places are better suited for certain goods, therefore it can be advantageous to take advantage of these differences.
What is the concept of absolute advantage?
- Provide an example of absolute advantage?
The ability to produce the same good using fewer inputs?
Units of Labor:
Computers: T-Shirts:
US: 1 1
Mexico: 12 2
- The US has the absolute advantage in the production of shirts and computers.
What is comparative advantage?
- Provide an example of comparative advantage?
- Assuming each country has 24 units of labor.
Production
Possibility:
Computers: or T-Shirts: US: 24 24 Mexico: 2 or 12
- Who has the comparative advantage?
- Producing goods at the lowest opportunity cost.
- Mexico has the comparative advantage in T-Shirts.
- The US has the comparative advantage in Computers.
Mexico: 1 shirt will cost 1/6 of a computer/ 1 computer will cost 6 shirts.
US: 1 Computer will cost 1 shirt/ 1 shirt will cost 1 computer.
T/F to benefit from trade a country doesn’t need to have an absolute advantage?
- True, a country can benefit from trade if it has a comparative advantage.
What is a production possibility frontier?
Shows all the combinations of goods that a country can produce given its productivity and supply of inputs.
How is the production possibility frontier represented on a graph?
It is a curve that ranges from the x & y-axis. The x and y-axis represent the products being produced and their max amounts based on the labor units available.
What makes trade profitable?
differences in comparative advantage.
