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Economics Chapter on Trade Concepts

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Questions and Answers

What does absolute advantage refer to?

The ability to produce a good at a lower opportunity cost.

The ability to produce more of a good using fewer resources.

The ability to produce more of a good than competitors using the same resources. (correct)

The capacity to consume beyond production possibilities.

How is comparative advantage determined?

By evaluating the total resources allocated to production.

By comparing averages of goods produced by different countries.

By assessing the overall production capacity of the country.

By calculating the opportunity cost of producing a good. (correct)

What does trade enable countries to do regarding their production possibilities?

Reduce their opportunity costs significantly.

Consume beyond their production possibilities frontier. (correct)

Remain within their production possibilities frontier.

Eliminate the need for specialization.

What does a straight-line Production Possibilities Frontier (PPF) indicate?

Constant opportunity costs between the two goods. Signup and view all the answers

Why is specialization based on comparative advantage beneficial for trade partners?

It allows for more efficient production of goods. Signup and view all the answers

What type of PPF suggests increasing opportunity costs?

A bowed-out PPF. Signup and view all the answers

In terms of opportunity cost, what must be sacrificed to produce one more unit of a good?

The amount of the other good that could have been produced. Signup and view all the answers

What is one of the primary outcomes of trade through specialization?

An increase in overall efficiency and welfare. Signup and view all the answers

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.