Trade/PPF Flashcards
What does the consumption possibility frontier (CPF) show?
The bundles of goods able to be consumed with trade - points outside the PPF that were previously unattainable are now able to be optimized with trade
Points outside the PPF that were previously unattainable are now able to be optimized with trade.
What does the CPF equal without trade?
PPF - Production Possibility Frontier
Without trade, you can only pursue what you can produce.
What are the two possible ways trade calculations can be presented?
- Level of production of each good (fish and coconuts)
- Input (labor) required to produce a unit of each good.
What happens when countries specialize in trade?
There will be individual winners and losers
Some workers will lose jobs, but goods will be cheaper for consumers.
True or False: The gains from trade outweigh the losses for consumers.
True
How do you calculate opportunity cost with input?
top number/bottom number
How do you calculate opportunity cost with outputs?
bottom number/top number
Define Absolute Advantage
ability to produce a greater quantity of a good/service than another entity using the same resources
Define Comparative Advantage?
producing a good or service in a more efficient manner (lower opportunity cost)
Define Opportunity cost
The next best option foregone - what you give up/what you gain
Rule for trade to occur
It has to fall in between the two opportunity costs.
What happens if trade is outside opportunity cost?
If it is outside opportunity cost, one party will be better off producing themselves than trading, for reasons such as;
- it is too expensive
- their own internal (without trade) opportunity costs would be lower than the price of trade
How does a CPF have a straight line?
Resources are perfectly interchangeable, there is a constant opportunity cost - the price at which trade occurs is constant
Where is the allocatively efficient point?
the market will guide the firm to the point on the PPF that consumers desire through price system
Why is the CPF a straight line?
The price of trade is constant
