Questions and Answers
The underlying reason why trade benefits both sides of a trading arrangement is rooted in the concept of __________________.
opportunity cost
What can result from the USA exporting wheat to China in exchange for pants?
there can be mutual gains from trade to the two countries
What are the opportunity costs of producing 1 orange for Alpha and Beta?
0.5 apples; 0.25 apples
The concept of _________________ means that as the measure of output goes up, average costs of production decline-at least up to a point.
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The theory of comparative advantage shows that the gains from international trade do not just result from the absolute advantage of producing at lower cost, but also from pursuing comparative advantage and producing at a lower ________________.
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When nations increase production in their area of _________________ and trade with each other, both sides can benefit.
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What does the idea behind comparative advantage reflect?
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What matters most in determining the efficient distribution of production over the world?
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According to international trade theory, what should a country do?
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Trade allows each country to take advantage of _________________ in the other country.
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Intra-industry trade between similar trading partners allows the gains from ______________________ that arise when firms and workers specialize in the production of a certain product.
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Jethro has a(n) __________________ in all aspects of camping.
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As measured in 2008, about _________ of U.S. trade and ________ of European trade is intra-industry trade.
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The slope of the production possibility frontier is determined by the ________________ of expanding production of one good.
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_____________________ identifies the area where a producer's absolute advantage is relatively greatest.
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Which party has an absolute advantage in producing food based on their production capabilities?
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What is one reason that nations trade?
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What advantage does Colombia have in coffee production?
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Study Notes
Opportunity Cost and Trade
- Opportunity cost explains why trade is mutually beneficial, emphasizing the trade-offs involved in production choices.
Comparative Advantage
- The USA has an opportunity cost of 5 bushels of wheat for producing a pair of pants, while China has an opportunity cost of 2 bushels, allowing for mutually beneficial trade between the two nations.
- Comparative advantage occurs when one party can create goods at a lower opportunity cost than another, leading to efficient production allocation.
Production Possibilities
- Alpha can produce either 18 oranges or 9 apples, giving an opportunity cost of 0.5 apples per orange, while Beta has an opportunity cost of 0.25 apples per orange by producing 16 oranges or 4 apples.
Economies of Scale
- Economies of scale refer to the reduction in average production costs as output increases up to a certain point, benefiting large-scale production.
International Trade Theory
- Comparative advantage is crucial in determining how countries should specialize in producing certain goods and trade with others to benefit from lower opportunity costs.
- Countries should import goods where they hold a comparative disadvantage, maximizing efficiency in global trade.
Intra-Industry Trade
- Intra-industry trade refers to trade between similar trading partners that focuses on gaining benefits through specialization, fostering learning and innovation.
Absolute Advantage
- Absolute advantage is the ability of a country or individual to produce more of a good than another. Jethro has an absolute advantage in all camping-related tasks.
Trade Statistics
- As of 2008, approximately 60% of U.S. trade and 60% of European trade is classified as intra-industry trade, highlighting the interconnectedness of economies.
Production Possibility Frontier
- The slope of the production possibility frontier reflects opportunity costs, illustrating how much of one good must be sacrificed to produce more of another.
Reasons for Trade
- Nations trade because they cannot produce all goods their citizens desire, necessitating reliance on international trade networks to fulfill demands.
Case Study: Alland and Georgeland
- Alland produces more food and clothing per person compared to Georgeland but will not engage in trade despite having an absolute advantage in food production. This situation underscores the complexities of trade beyond simple production figures.
Absolute Advantage in Coffee Production
- Colombia is identified as having an absolute advantage in coffee production, utilizing fewer resources (labor and land) compared to other countries.
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Description
This quiz covers key concepts in economics, focusing on opportunity costs and trade, including comparative advantage and production possibilities. Explore how these principles lead to mutually beneficial trade and efficient production allocation. Test your understanding of economies of scale and international trade theory.
