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Questions and Answers
What does absolute advantage refer to?
How is comparative advantage determined?
What does trade enable countries to do regarding their production possibilities?
What does a straight-line Production Possibilities Frontier (PPF) indicate?
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Why is specialization based on comparative advantage beneficial for trade partners?
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What type of PPF suggests increasing opportunity costs?
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In terms of opportunity cost, what must be sacrificed to produce one more unit of a good?
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What is one of the primary outcomes of trade through specialization?
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Study Notes
Absolute Advantage
- The ability to produce more of a good or service than competitors using the same amount of resources.
- Calculated by directly comparing the production capabilities of each country for each good.
Comparative Advantage
- The ability to produce a good at a lower opportunity cost than another party.
- Opportunity cost is the amount of the other good that must be given up to produce one more unit of the good in question.
Gains from Trade
- Trade allows countries to consume beyond their production possibilities frontier (PPF).
- Numerical examples can be used to show the gains from trade.
Production Possibilities Frontier (PPF)
- The PPF shows the maximum amount of two goods that can be produced with a given set of resources.
- The slope of the PPF represents the opportunity cost of one good in terms of the other.
- A straight-line PPF indicates constant opportunity costs.
- A bowed-out PPF indicates increasing opportunity costs.
Specialization and Trade
- Specialization based on comparative advantage allows for more efficient production.
- Trade partners benefit from exchange if they specialize in producing goods where they have a comparative advantage.
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Description
This quiz covers key concepts in economics related to absolute advantage, comparative advantage, and gains from trade. It also explores the Production Possibilities Frontier (PPF) and its implications for resource allocation and opportunity costs. Test your understanding of these fundamental topics in trade and production economics.
