Macroeconomics Chapter 2

trade

the act of buying and selling

what is absolute advantage? what is comparative advantage? is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? briefly explain

Absolute advantage is the ability to produce more of a good or service than competitors using the same amount of resources. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than competitors. It is possible to have a comparative advantage in producing a good even if someone else has an absolute advantage in producing that good (and every other good). Unless the two producers have exactly the same opportunity costs of producing two goods—the same trade-off between the two goods—one producer will have a comparative advantage in making one of the goods and the other producer will have a comparative advantage in making the other good.

can an individual or a country produce beyond its production possibilities frontier? can an individual or a country consume beyond its production possibilities frontier?

An individual or a country cannot produce beyond its production possibilities frontier. The production possibilities frontier shows the most that an individual or country can produce for a given amount of resources and technology. Without trade, an individual or country cannot consume beyond its production possibilities frontier, but with specialization and trade an individual or country can consume beyond its production possibilities frontier. In Figure 2.5, both you and your neighbor were able to consume beyond your production possibilities frontiers, and in Solved Problem 2.2, both Canada and the United States were able to consume beyond their production possibilities frontiers.

What does increasing marginal opportunity costs mean? What are the implications of this idea for the shape of the production possibilities frontier?

Increasing marginal opportunity costs means that as more and more of a product is made, the opportunity cost of making each additional unit rises. It occurs because the first units of a good are produced with the resources that are best suited for making it, but as more and more of the good is produced, resources must be used that are better suited for producing something else. Increasing marginal opportunity costs imply that the production possibilities frontier is bowed out—that its slope gets steeper and steeper as you move down the production possibilities frontier.

what do economists mean by scarcity? can you think of anything that is not scarce according to the economic definition?

Scarcity is the situation in which wants exceed the limited resources available to fulfill those wants. There are some things that are available in such abundance that they exceed our wants. For example, for most people there is enough oxygen in the atmosphere that the amount they want to inhale equals or exceeds the amount available—so oxygen isn't scarce for them. Another example might be something undesirable, such as weeds in your garden—unlike tomato plants, the amount of weeds available exceeds the amount you desire.

what is the basis for trade: absolute advantage or comparative advantage? how can an individual or a country gain from specialization and trade?

The basis for trade is comparative advantage. If each party specializes in making the product for which it has the comparative advantage, they can arrange a trade that makes both of them better off. Each party will be able to obtain the product made by its trading partner at a lower opportunity cost than without trade.

what is a production possibilities frontier? how can we show efficiency on a production possibilities frontier? how can we show inefficiency? what causes a production possibilities frontier to shift outward?

The production possibilities frontier (PPF) is a curve showing all the attainable combinations of two products that may be produced with available resources and existing technology. Combinations of goods that are on the frontier are efficient because all available resources are being fully used, and the fewest possible resources are being used to produce a given amount of output. Points inside the production possibilities frontier are inefficient because the maximum output is not being obtained from the available resources. A production possibilities frontier will shift outward (to the right) if more resources become available for making the products or if technology improves so that firms can produce more output with the same amount of inputs.

PPF (production possibilities frontier)

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology

market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

free market

a market with few government restrictions on how a good or service can be produced or sold on how a factor of production can be employed

scarcity

a situation in which unlimited wants exceed the limited resources available to fulfill those wants

entrepreneur

someone who operates a business, bringing together the factors of production-labor, capital, and natural resources- to produce goods and services

comparative advantage

the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

economic growth

the ability of the economy to increase the production of goods and services

opportunity cost

the highest valued alternative that must be given up to engage in an activity

factors of production

the inputs used to make goods and services

property rights

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it