Economics Chapter 3: Comparative Advantage

Questions and Answers

What is an absolute advantage?

Absolute advantage refers to the ability to produce more or better goods and services than somebody else.

What is a comparative advantage?

Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost.

Explain how a nation can gain from trade even though as a result not everyone is better off.

More available and cheaper products to consumers.

What is mercantilism?

It is a system that stressed export over imports. Signup and view all the answers

What is 'zero sum'?

One person's gain is one person's loss. Signup and view all the answers

Describe the Ricardian Model.

It assumes that firms are price takers and markets are competitive, with no firm having market power. Signup and view all the answers

What is the Production Possibilities Curve (PPC)?

Shows the trade-off a country faces when it chooses its combination of bread and steel. Signup and view all the answers

What is the Consumption Possibilities Curve (CPC)?

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What is relative price?

The opportunity cost. Signup and view all the answers

What is autarky?

A complete absence of trade. Signup and view all the answers

What is Absolute Productivity Advantage?

It is defined as having higher labor productivity. Signup and view all the answers

What is Comparative Productivity Advantage?

Its opportunity costs of producing goods are lower than those of its trading partners. Signup and view all the answers

What is Trade Adjustment Assistance (TAA)?

Programs that take the form of extended unemployment benefits and worker re-training. Signup and view all the answers

Study Notes

Absolute and Comparative Advantage

Absolute Advantage: Ability to produce more or superior goods/services than another entity.
Comparative Advantage: Capability to produce goods/services at a lower opportunity cost, not necessarily in greater quantities.

Gains from Trade

Trade can lead to more affordable and diverse products for consumers, enhancing market availability even if not all individuals benefit equally.

Economic Theories

Mercantilism: Economic policy prioritizing exports over imports to increase national wealth.
Zero Sum Game: Concept where one party's gain equates to another's loss, emphasizing a fixed amount of total wealth.

Ricardian Model

Establishes a framework where firms operate as price takers, implying a competitive market environment without monopolistic control.

Production and Consumption Possibilities

Production Possibilities Curve (PPC): Illustrates trade-offs when selecting combinations of goods, like bread and steel, indicating opportunity costs.
Consumption Possibilities Curve (CPC): Represents maximum attainable combinations of goods a consumer can achieve given production capabilities and trade.

Price and Trade Conditions

Relative Price: Represents the opportunity cost associated with producing one good over another, guiding trade decisions.
Autarky: Describes a scenario of complete economic self-sufficiency with no trade.

Productivity Advantages

Absolute Productivity Advantage: Defined through higher labor productivity compared to other entities.
Comparative Productivity Advantage: Occurs when a nation has lower opportunity costs for production relative to trading partners.

Trade Adjustment Assistance (TAA)

Programs designed to support workers who experience job loss due to trade, offering extended unemployment benefits and opportunities for re-training.

Description

This quiz focuses on key concepts of comparative and absolute advantage as discussed in Chapter 3 of Economics. Understand how these principles apply to trade and production efficiency. Test your knowledge with flashcards that define these vital economic concepts.