Economics: Comparative Advantage

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Questions and Answers

What is the main reason why people or countries focus on a limited set of activities?

Because of the lack of resources

Because they become better at something when they do it often (correct)

Because of differences in skill and ability

Because they have an absolute advantage in production

What happens when one person or country can produce something better than any other person or country?

They have a competitive advantage

They have a production advantage

They have an absolute advantage (correct)

They have a comparative advantage

What is the term for when a person or country can produce a good at a lower cost relative to another good than any other person or country?

Absolute advantage

Economies of scale

Comparative advantage (correct)

Learning by doing

What is the percentage increase in output due to the new agricultural practices?

10% Signup and view all the answers

What is the relationship between the number of farmers and the production of grain in the table provided?

The production of grain increases at a decreasing rate as the number of farmers increases Signup and view all the answers

What is the average product of labour (APL) in the table provided when there are 200 farmers?

910 kg per farmer Signup and view all the answers

What is the new total production per year in kgs when 100 farmers are employed?

110 000 Signup and view all the answers

What is the average product of labour in kgs when 300 farmers are employed?

833 Signup and view all the answers

What is the equilibrium number of farmers if the subsistence level of income is 751 kg of maize per farmer?

500 farmers Signup and view all the answers

What is the point at which the APL curve will shift to after the technological change?

To the right Signup and view all the answers

What is the term for the process of people's self-interest leading to the enhancement of public good or welfare?

The invisible hand Signup and view all the answers

How will equilibrium be restored in a Malthusian economy if the population is 200 farmers?

The number of farmers will decrease until the subsistence level is reached Signup and view all the answers

How will equilibrium be restored in a Malthusian economy if the population is 600 farmers?

The number of farmers will decrease until the subsistence level is reached Signup and view all the answers

What is the number of farmers at which the APL is 910 kgs?

400 Signup and view all the answers

Who is the author of the book 'An Inquiry into the Nature and Causes of the Wealth of Nations'?

Adam Smith Signup and view all the answers

What is the new average product of labour in kgs when 700 farmers are employed?

578 Signup and view all the answers

What is the term for a period of significant technological change that transformed an agrarian economy into an industrial and commercial economy?

Industrial Revolution Signup and view all the answers

According to Thomas Malthus, how will equilibrium be restored?

Through population growth Signup and view all the answers

What is the term for the value of final goods and services produced within the borders of a country in a particular quarter or year?

Gross Domestic Product Signup and view all the answers

Who wrote the book 'Das Kapital'?

Karl Marx Signup and view all the answers

What is the shape of the APL curve?

Downward sloping Signup and view all the answers

What is the main characteristic of a feudal economic system?

A hereditary landlord owns the land and serfs are indentured to the lord Signup and view all the answers

What is the term for the process of voluntarily transferring goods and services from one person to another, to the mutual benefit of both parties?

Trade Signup and view all the answers

What is the term for the fact that the using up of natural resources and other man-made activities is causing an increase in temperatures globally?

Climate Change Signup and view all the answers

What does GDP per capita measure?

The average standard of living in a country Signup and view all the answers

What is the term for a way of organizing production, where one or more individuals own the firm, and the firm employs people who are paid a wage or a salary?

Capitalism Signup and view all the answers

What is the purpose of dividing the population into income deciles?

To rank the population by income per capita Signup and view all the answers

What is the 'invisible hand' associated with?

Adam Smith's theory of economics Signup and view all the answers

Who is the author of 'The Communist Manifesto'?

Karl Marx Signup and view all the answers

What is the term for the process of dividing labor into specialized tasks?

Specialisation Signup and view all the answers

What is the term for the idea that countries should specialize in producing goods for which they have a lower opportunity cost?

Comparative advantage Signup and view all the answers

What is the Industrial Revolution associated with?

The rise of industrialization Signup and view all the answers

What is the primary cause of the population growth in the initial scenario?

People having more children and living longer Signup and view all the answers

What is the consequence of the growing population on the APL?

It decreases as people are forced to farm less fertile land Signup and view all the answers

What happens to the population when it reaches the subsistence level?

It starts to shrink due to increased mortality and reduced birth rate Signup and view all the answers

What is the result of the population shrinking on the APL?

It increases as people can farm relatively more fertile land Signup and view all the answers

What is the effect of the technological improvement on the equilibrium point?

It shifts to point B Signup and view all the answers

What is the living standard at point B?

Above the subsistence level Signup and view all the answers

What happens to the population when the equilibrium shifts to point C?

It grows Signup and view all the answers

What is the population size at point C?

Just short of 500 farmers Signup and view all the answers

Study Notes

Comparative Advantage

When people/workers focus on a limited set of activities/production based on differences in skill and ability and because we become better at something when we do it often (learning by doing), and because of economies of scale.
When one person/country can produce something better than any other person/country.
When, even though a person/country does not have an absolute advantage in the production of any good, the cost of producing that good relative to the cost of another good is lower than can be produced by any other person or country.

Malthusian Economy

A small traditional society living in Central Africa, where the relationship between the number of farmers and the production of grain is shown in the table below.
As the number of farmers increases, the total production of grain increases, but the average product of labour (APL) decreases.
The APL curve shows the relationship between the number of farmers and the average product of labour.
The equilibrium number of farmers is 400, where the average product of labour is equal to the subsistence level of income (751 kg of maize per farmer).
If the population is above 400, the APL will be below the subsistence level, and some people will literally die of starvation, leading to a decrease in population.
If the population is below 400, the APL will be above the subsistence level, and the population will increase.

Technological Change

If new agricultural practices develop that increase the output by 10%, the total production of grain will increase, and the APL will increase.
The new APL curve will show the new relationship between the number of farmers and the average product of labour.
The equilibrium will shift to a new point, where the standards of living are above the subsistence wage, leading to an increase in population.
Eventually, a new equilibrium will be found at a point where the enlarged population will barely survive at the subsistence wage of 751 kg.

Key Concepts

Feudalism: a traditional economic system where a hereditary landlord owns the land and serfs are living on the land and are indentured to the lord.
GDP per capita: the value of final goods and services produced within the borders of a country in a particular quarter or year, divided by the total population.
Income deciles: dividing the population, ranked by income per capita, into ten groups/bins of people.
Adam Smith: Scottish philosopher who lived in the 18th century, best known for his book An Inquiry into the Nature and Causes of the Wealth of Nations (1776).
Karl Marx: economist of the 19th century, author of Das Kapital (1867) and the Communist Manifesto (1848).
Invisible hand: a metaphor used by Adam Smith to describe the fact that people’s self-interest leads them to do things that will enhance the public good/welfare.
Industrial Revolution: a period of great technological change, starting in late 18th century England, which transformed an agrarian economy into an industrial and commercial economy.

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Description

This quiz covers the concept of comparative advantage, where countries or individuals specialize in production based on their relative efficiency and skill. It explores the benefits of trade and specialization in economics.