Globalisation and Comparative Advantage

Question 1

What is a Production Possibility Frontier?

Answer 1

The combination of two goods that people in the economy can make given the resources they have available

Question 1

What is the slope of the PPF?

Answer 1

This is the opportunity cost of substituting one good for another

Question 2

What is a planned economy?

Answer 2

-Government decides what products should be produced in what quantities
-Planners work out what intermediate goods are needed
-High informational needs and knowledge at every stage of the value chain

Question 3

What is a market economy?

Answer 3

-Firms decide what they want to produce and sell
-Individual decide what they want to buy
-Government sets the rules

Question 4

What is an absolute advantage?

Answer 4

This is when one firm can produce something more cheaply than another firm

Question 5

What is a comparative advantage?

Answer 5

A firm should produce and export products where its relative advantage is greatest

Question 6

What does a country’s Terms of Trade measure?

Answer 6

• Weighted average of the country’s export prices and its import prices
  -P(export)/P(import)