Economics Production Possibilities Quiz
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Questions and Answers

What does the equation aLCQC + aLWQW ≤ L represent?

  • Total amount of labour resources in the economy (correct)
  • Total production cost of cheese and wine
  • Total consumption of cheese and wine
  • Total revenue generated from cheese and wine

What happens if the price of cheese per unit labour cost is higher than that of wine?

  • Workers will only make cheese (correct)
  • Workers will evenly distribute between cheese and wine production
  • Production levels of cheese will decrease
  • Workers will only make wine

What does the slope of the production possibilities frontier indicate?

  • The total units of labour allocated
  • The total amount of wine produced
  • The efficiency of resource allocation
  • The opportunity cost of producing cheese in terms of wine (correct)

In the context of production wages, what is the correct equation for the price of cheese?

<p>$P_C = w_C a_LC$ (D)</p> Signup and view all the answers

If the production possibilities frontier is represented by the equation aLCQC + aLWQW = L, what does this signify?

<p>Total labour resources are being fully utilized (C)</p> Signup and view all the answers

Which of the following relationships would require workers to switch from cheese to wine production?

<p>$P_C / a_LC &lt; P_W / a_LW$ (D)</p> Signup and view all the answers

What does the variable QW represent in the production possibilities equation?

<p>The total amount of wine produced (C)</p> Signup and view all the answers

Which factor primarily influences the choice of industry for workers in a competitive market?

<p>The wage differences between sectors (B)</p> Signup and view all the answers

Which country exhibits a stronger comparative advantage in textiles and apparel?

<p>China (B)</p> Signup and view all the answers

What was the productivity ratio of Chinese output per worker to that of Germany in 1995?

<p>5% (C)</p> Signup and view all the answers

How much more productive is the U.S. compared to China in textiles?

<p>16 times (D)</p> Signup and view all the answers

Which of the following industries reported a significant reduction in production capacity in 1999 due to increased imports from Asia?

<p>Apparel (B)</p> Signup and view all the answers

What is the sales per employee for U.S. apparel producers?

<p>$92,000 (B)</p> Signup and view all the answers

What is the productivity of the U.S. in wheat compared to China?

<p>275 times more productive (B)</p> Signup and view all the answers

What is the annual sales per employee in the textile industry in China?

<p>$9,000 (C)</p> Signup and view all the answers

Relative wages in the Ricardian model are expected to reflect what aspect?

<p>Relative productivities (B)</p> Signup and view all the answers

What happens to the caviar industry when the relative wage increases from 3.99 to 4.01?

<p>The caviar industry relocates to the Foreign country. (A)</p> Signup and view all the answers

Which of the following is a reason why complete specialization rarely occurs according to the Ricardian model?

<p>Transportation costs may reduce or prevent trade. (D)</p> Signup and view all the answers

Why might some goods become non-tradable according to the content?

<p>Increased transportation costs. (B)</p> Signup and view all the answers

What does empirical evidence suggest about technology and trade patterns?

<p>Countries export goods in which they have a comparative advantage. (B)</p> Signup and view all the answers

What effect does an increase in relative wage have on the demand for labor in the Home country?

<p>Demand for specific goods may decrease. (D)</p> Signup and view all the answers

What can prevent a country from achieving complete specialization in the Ricardian model?

<p>Multiple factors of production. (B)</p> Signup and view all the answers

How does a rise in transportation costs impact trade?

<p>It can minimize the likelihood of trade and reduce non-tradability. (C)</p> Signup and view all the answers

What happens when the relative price of cheese falls below $a_{LC}/a_{LW}$?

<p>Home will specialize in wine production. (B)</p> Signup and view all the answers

At what point are Home workers indifferent between producing wine or cheese?

<p>When $P_C/P_W = a_{LC}/a_{LW}$ (D)</p> Signup and view all the answers

What is the relationship between pre-trade relative prices and equilibrium relative prices in world markets?

<p>They necessarily fall within the pre-trade price interval. (D)</p> Signup and view all the answers

What will occur when $P_C/P_W$ is greater than $a_{LC}/a_{LW}$ but less than $a_{*LC}/a_{*LW}$?

<p>Home will specialize in cheese production. (D)</p> Signup and view all the answers

How is relative supply of cheese calculated?

<p>$(Q_C + Q^{<em>}_C)/(Q_W + Q^{</em>}_W)$ (C)</p> Signup and view all the answers

What will occur when $P_C/P_W = a_{*LC}/a_{*LW}$?

<p>Home workers will be indifferent to production. (C)</p> Signup and view all the answers

Relative demand of cheese is defined as what?

<p>The quantity of cheese demanded relative to the quantity of wine demanded at each price. (C)</p> Signup and view all the answers

When does Foreign workers produce only wine?

<p>When $P_C/P_W &lt; a_{LC}/a_{LW}$ (A)</p> Signup and view all the answers

What is the primary benefit of trade between countries?

<p>Expansion of consumption due to specialization according to comparative advantage (A)</p> Signup and view all the answers

In the context of comparative advantage, which country has the comparative advantage in cheese production?

<p>Home country (C)</p> Signup and view all the answers

What must the equilibrium relative price of cheese be with trade between Home and Foreign countries?

<p>Between 1/2 and 2 (B)</p> Signup and view all the answers

How much cheese can the Foreign country produce with one hour of labor without trade?

<p>1/6 pound (C)</p> Signup and view all the answers

If the Home country trades one pound of cheese, how much wine will it obtain?

<p>1 gallon (D)</p> Signup and view all the answers

What is the unit labor requirement for wine production in the Foreign country?

<p>3 hours/gallon (B)</p> Signup and view all the answers

Why is it said that the Home country has a comparative advantage in cheese?

<p>It has lower labor requirements relative to foreign cheese production. (A)</p> Signup and view all the answers

What does the trade scenario suggest about the production capabilities of the Home country compared to the Foreign country?

<p>Home has an efficiency advantage only in cheese production. (D)</p> Signup and view all the answers

How many hours of labor are required to produce 1 pound of cheese using the direct method of production?

<p>6 hours (B)</p> Signup and view all the answers

What is one potential benefit for a technologically backward country engaging in free trade?

<p>It avoids high costs for domestically produced goods. (B)</p> Signup and view all the answers

What does the theory of unequal exchange suggest about lower wages in trade?

<p>They exploit countries, making them worse off. (A)</p> Signup and view all the answers

Which statement about comparative advantage is accurate?

<p>Lower wages can offset disadvantages due to low productivity. (D)</p> Signup and view all the answers

What misconception exists regarding free competition and low wages?

<p>It can be unfair to other countries. (A)</p> Signup and view all the answers

Which of the following is a benefit of free trade for consumers?

<p>Access to efficiently produced goods. (A)</p> Signup and view all the answers

How much wine can be produced with one hour of labor in a foreign country?

<p>1/3 gallon (C)</p> Signup and view all the answers

What misconception suggests that trade arises only from strong countries?

<p>Weaker countries do not benefit from trade. (C)</p> Signup and view all the answers

Flashcards

Production Possibility Frontier (PPF)

Represents the maximum amount of goods a country can produce with its available resources, assuming full employment.

Labor Requirement

The amount of labor needed to produce one unit of a good.

PPF Equation

The equation representing the PPF, showing the relationship between labor, labor requirements, and production of goods.

Opportunity Cost

The amount of one good that must be sacrificed to produce one more unit of another good.

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Price and Average Cost Relationship

The price of a good is equal to its average cost, which is determined by the unit labor cost.

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Wage Maximization

Workers will move to the industry that offers the highest hourly wage.

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Wage Calculation

The wage in a sector is determined by the price of the good and the labor requirement for that good.

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Wage Differential and Production Choice

When the price of cheese is higher than the price of wine (adjusted for labor requirements), more workers will choose to produce cheese.

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Absolute Advantage

A situation where one country can produce a good more efficiently than another country.

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Comparative Advantage

A situation where one country can produce a good at a lower opportunity cost than another country.

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Productivity

The output per worker in a particular industry.

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Productivity Gap

The difference in productivity between two countries in the same industry.

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Ricardian Model

A model of trade where countries specialize in producing goods they're relatively more efficient at.

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Wage Reflection of Productivity

A situation where relative wage levels reflect the relative productivity of countries in producing goods.

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Importing Despite Higher Productivity

A situation where one country imports goods even though it has higher productivity in producing those goods.

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Equilibrium Relative Price

The relative price of two goods is determined by the ratio of their unit labor requirements. This price must lie within a range determined by the opportunity costs of the trading countries.

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Unit Labor Requirement (a)

The amount of labor required to produce one unit of a good. Lower unit labor requirements mean higher efficiency.

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International Trade

The process by which countries specialize in producing goods where they have a comparative advantage and then trade those goods with other countries.

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Gains from Trade

The gains from trade stem from the expansion of consumption possibilities for each country due to specialization and trade. This allows each country to consume beyond its own production possibilities frontier.

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Production Possibilities Frontier (PPF)

The curve that represents all the possible combinations of goods that a country can produce with its available resources. Trade can allow countries to consume beyond their production possibilities frontier.

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Benefits of Trade for Less Productive Countries

Even countries with lower productivity can benefit from trade because they can specialize in goods with relatively lower production costs.

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Cost Advantage Factors

A country's cost advantage depends not just on productivity, but also on wages.

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Benefits of Trade for High-Wage Countries

Free trade can benefit high-wage countries by allowing them to access cheaper goods produced in lower-wage countries.

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Unequal Exchange Fallacy

Trade is not exploitative even when there are wage differences; it's a voluntary exchange with potential benefits for both sides.

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Trade and Development

Even if wages are low, trade can still benefit workers in developing countries by providing them with jobs and opportunities.

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Trade and Labor Standards

High wages and safe labor practices are not mutually exclusive with trade; they can coexist and even contribute to a country's competitiveness.

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Relative Price with Trade

The price of a good in one country compared to the price of the same good in another country.

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Relative Supply of Cheese

The amount of a good produced by all countries relative to the amount of another good produced by all countries at a specific price.

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Relative Demand of Cheese

The amount of a good demanded by all countries relative to the amount of another good demanded by all countries at a specific price.

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Opportunity Cost and Relative Prices (Without Trade)

The opportunity cost of producing a good is equal to the relative price of that good. This applies when there is no trade.

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Specialization in Wine Production with Trade

If the relative price of cheese is below the opportunity cost of cheese production, then Home will specialize in wine production. This means they will produce only wine.

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Specialization in Cheese Production with Trade

If the relative price of cheese is between the opportunity cost of producing cheese in Home and Foreign, then Home will specialize in cheese production, while Foreign will continue to specialize in wine.

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Equilibrium Relative Price with Trade

The equilibrium relative price will fall between the pre-trade relative prices of the two countries. This means that the relative price of cheese will be somewhere between the opportunity cost of producing it in both Home and Foreign.

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Global Supply and Demand and Relative Prices

The relative price of a good is determined by forces of global supply and demand. This means the relative price of cheese in world markets is affected by the amount of cheese produced and demanded globally.

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Discrete Drop in Labor Demand

A change in relative wages where the Home country's wage increases significantly, causing a shift in production from the Home to the Foreign country. The industry that moves (like caviar) will experience a sudden decrease in demand for labor in the Home country.

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Decreased Demand for Labor with Rising Wages

As the relative wage of a country rises, its production of goods with a comparative advantage may decline due to increased costs. This is because the demand for labor in those industries decreases as wages rise.

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Shift in Production due to Wage Differential

If the relative wage of a country is high enough, it may be too costly to produce certain goods in the home country, forcing those industries to move to countries with lower wages.

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Why Complete Specialization Doesn't Happen

The Ricardian model predicts complete specialization in goods with a comparative advantage, but in reality, several factors prevent this from happening.

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Multiple Factors of Production

The presence of multiple factors of production, like land, labor, and capital, prevents complete specialization as countries need diverse resources for various industries.

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Protectionism and Transportation Costs

Trade barriers like tariffs and quotas, along with transportation costs, can limit specialization by making trade less favorable and increasing the cost of imported goods, making local production more competitive.

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Non-Tradable Services

Some services are difficult to trade across borders due to the nature of the service, meaning countries may produce and consume these goods within their own borders. Example: haircuts.

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Comparative Advantage and Exports

Countries tend to export goods in which they have a comparative advantage, indicated by high productivity relative to other countries.

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Study Notes

Introduction to Labour Productivity and Comparative Advantage: The Ricardian Model

  • Countries trade due to their differences and to achieve economies of scale in production.
  • Comparative advantage exists when a country has a lower opportunity cost of producing a good than other countries.
  • Absolute advantage exists when a country produces a good or service more efficiently than other countries.

Concepts

  • Market size and distance between countries influence trade volume (gravity model).
  • Theories on trade differ on how they explain specialization patterns.
  • Trade is beneficial for all countries (gains from trade).
  • Differences in labour, capital, resources and technology create comparative advantages.
  • The Ricardian model explains that differences in labour productivity (productivity of labour) cause comparative advantages.
  • The Heckscher-Ohlin model suggests that differences in factor endowments (labour, skills, capital, land) create comparative advantages.
  • Even similar countries can have comparative advantages due to historical factors and economies of scale.

Assumptions of the Ricardian Model

  • Only two countries, Home and Foreign, and two goods, wine and cheese.
  • Labour is the only production factor.
  • Labour supply is constant over time.
  • Labour productivity varies between countries.
  • Labour productivity is constant over time (doesn't change with production volume).
  • Workers can freely move between sectors.
  • Consumer preferences are equal across countries.
  • There are no transportation costs or trade barriers.

Production Possibilities

  • The production possibility frontier (PPF) shows the maximum amount of goods that can be produced with available resources and technology.
  • The PPF equation is ALCQC + ALWQw ≤ L.

Production, Prices and Wages

  • The price of a good equals its unit labour cost (e.g., Pc = wc aLc).
  • Hourly wages equal the market value of output produced in an hour (e.g., wc = Pc/aLc).
  • Workers move to sectors with higher wages.
  • Countries specialize in production based on a comparison of relative wage and productivity.

Trade in the Ricardian Model

  • Home being more efficient than Foreign in both wine and cheese production means Home has an absolute advantage.
  • Comparative advantage is determined by which good/ service has the lower relative opportunity cost than its counterpart(e.g. aLC/aLw < aLC/aLW).

Relative Prices with Trade

  • Without trade, the relative price of a good is equal to its opportunity cost.
  • Relative prices with trade may adjust to a level between the pre-trade relative prices.
  • Trade leads to a reduction in the price of the less productive good.
  • The relative price of a good falls when the wage rises.

Gains from Trade

  • Trade allows countries to specialize in producing goods/ services where they have a comparative advantage.
  • This leads to increased production/ consumption possibilities.
  • Trade increases the income of workers and lowers consumer prices.
  • The "trade technology" converts goods efficiently into other goods based on comparative advantages.

Empirical Evidence

  • The Ricardian model often doesn't predict complete specialization (e.g., due to factors like multiple production factors and transportation costs).
  • There are examples where countries have comparative advantages due to factors such as low wages, and high productivity.
  • Productivity often, but not always follows the trend of wages across countries.

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Labour Productivity and Comparative Advantage (Ricardian Model) PDF

Description

This quiz explores the concepts related to production possibilities, including equations, comparative advantage, and industry choices. Test your understanding of the production possibilities frontier and how various factors influence economic decisions in production. Perfect for students studying economics at an advanced level.

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