Questions and Answers
What is absolute advantage?
What is the definition of absolute advantage?
The ability to produce a good using fewer inputs than another producer.
What does comparative advantage refer to?
The ability to produce a good or service at a lower opportunity cost than another.
When trading with more developed countries, less developed countries have a comparative advantage in the production of some goods or services.
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Absolute advantage is the source of the potential gains from specialization and trade.
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It can be mutually beneficial for two nations to specialize in goods for which they have a comparative advantage and then trade with one another.
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A nation will not have a comparative advantage in a product if it does not also have an absolute advantage in the production of that good.
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If a farmer gives up 16 bushels of corn to obtain 6 bushels of beans, what is the opportunity cost of 1 bushel of beans?
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What does the production possibilities frontier show?
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Which of the following statements is TRUE?
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According to the theory of comparative advantage, why are wages lower in China than in the United States?
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What is globalization?
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The process of specialization and trade has positive net benefits. True or False?
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Study Notes
Absolute Advantage
- Defined by comparing different producers based on input requirements per unit of output.
- A country has an absolute advantage if it can produce a good at a lower cost (fewer inputs) than another country.
Comparative Advantage
- Refers to producing a good or service at a lower opportunity cost than another producer.
- Countries often have a comparative advantage in specific goods or services, particularly when trading with more developed nations.
Specialization and Trade
- Nations can benefit by specializing in goods they produce best (comparative advantage) and trading these goods.
- Specialization and trade can reduce per unit production costs, creating economies of scale.
Opportunity Cost
- Opportunity cost of a good is what must be given up to produce it; for example, if a farmer sacrifices 16 bushels of corn to produce 6 bushels of beans, the opportunity cost of 1 bushel of beans is approximately 2.67 bushels of corn.
Division of Knowledge
- Refers to individuals learning different tasks within their specialization which leads to improved productivity.
Effects of Specialization
- The process of nations specializing based on comparative advantage can lead to increased wages, total output, and improved living standards across trading countries.
Production Possibilities Frontier
- Illustrates the combinations of outputs a country can produce with its available resources and productivity levels.
Globalization
- Characterized as the advancement of human cooperation beyond national borders.
Trade and Wages
- Specialization and trade typically result in increased wages in both trading countries.
- Disparities in wages between countries, such as lower wages in China compared to the U.S., can often be attributed to differences in productivity.
Key Theorems
- A producer does not require an absolute advantage to have a comparative advantage in a product.
- Specialization can lead to mutual benefits, but may not necessarily provide gains for all participating parties.
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Description
Test your knowledge of key concepts in Economics Chapter 2 with these flashcards. Explore terms like absolute advantage and comparative advantage, and understand how different producers can affect cost efficiencies. Perfect for students looking to reinforce their understanding of economic principles.
