Week 2 - Chapter 3: Why everybody trades: comparative advantage

Question 1

What are the two factors that define an economy’s ability to produce?

Answer 1

Labour productivity

Number of hours

Question 2

Labour productivity

Answer 2

The number of units of output that a worker can produce in one hour

Question 3

Opportunity cost

Answer 3

The opportunity cost of producing more of a product in a country is the level of production of some other product that must be given up

Opportunity cost exists because resources must be shifted from one product to another in order to change production levels

Question 4

Principle of comparative advantage

Answer 4

A country will export good and services that it can produce at a low opportunity cost and import the goods and services that it would otherwise produce at a high opportunity cost

Question 5

Relative price

Answer 5

The ratio of one product’s price to another product’s price

Question 6

Arbitrage

Answer 6

Buying at the low price in one place and selling at the high price in another place