Exchange and comparative advantage

Question 1

What are the two concepts of advantage?

Answer 1

1. Comparative advantage
2. Absolute advantage

Question 2

What is comparative advantage?

Answer 2

Defined by the marginal rate of transformation, the opportunity cost of transforming 1 good into another - drives specialization and trade

Question 3

What is marginal rate of transformation

Answer 3

how 1 product can be transformed into another using available resources

Question 4

What is absolute advantage

Answer 4

Defined by production functions and marginal production, irrelevant to trade

Question 5

What are mutual gains?

Answer 5

Each agent should specialise in where they have comparative advantage and trade for other good - increasing welfare

Question 6

What are trade barriers with advantages

Answer 6

Tariffs and import restrictions reduce trade, limit specialization, and prevent Pareto improvements.

Question 7

The circular model of the economy

Answer 7

Highlights that transactions are two-sided
- people work and invest to consume goods - not for money or profit
- Countries export not to accumulate wealth but to finance imports

Question 8

What are pareto improvements

Answer 8

Possible to make one party better off without harming another

Question 9

What does Bilateral trade allow for

Answer 9

Exchanged allows societies to achieve greater outcomes than the sum of individual

Question 10

Two positive to trade

Answer 10

1. Maximises welfare by enabling each party to specialise in what they produce better
   so benefits society
2. Even less advanced countries can compete in areas of competitive advantage

Question 11

One negative to trade

Answer 11

Harms specific industries
(e.g workers in declining sectors)