Econ Unit 4

Absolute Advantage

A country is said to have the absolute advantage in the production of a good or service if that country can produce a larger number of units of that good or service than can another country, using equivalent amounts of resources and technology. For example, if country A can produce 1000 cars per month with 20 workers and country be can produce 1200 cars per month with 20 workers, then country B would be said to have the absolute advantage in car production.

Comparative Advantage

A country is said to have the comparative advantage in the production of a good or service if that country can produce a unit of that good or service at a lower opportunity cost. For example, if country A can produce an additional car by moving resources away from bike production and this means a sacrifice of 200 bikes while country B can produce an additional car by moving resources away from bike production and this means a sacrifice of 300 bikes, then country A would be said to have the comparative advantage in car production because it has the lower opportunity cost of producing cars.

Labor

A country's labor input refers to its workers and the skills and knowledge (human capital) possessed by its workers.

Capital

Capital refers to things that are man-made (such as machinery, tools, and factories) that can then be used to help produce more goods and services.

Entrepreneurship

Entrepreneurship refers to the risk-taking behavior of individuals who are willing to try to come up with new and better products and/or production methods.

Human Capital

Human capital refers to the skills and knowledge workers possess. These skills and knowledge help the worker to be more productive. As such, human capital is part of a country's bundle of production resources and a country can increase its ability to produce goods and services (shift out its production possibilities frontier) by providing more education and training to its workers.

Resources Identical in Production

If a country's resources are identical in production there are no specialists. This would mean that everyone in the country is equally skilled at surgery, equally skilled at book-keeping, equally skilled at dancing, and so on. This would give rise to a straight-line production possibilities frontier with a constant opportunity cost.

Labor Force

Labor force refers to the number of individuals in a country who are counted as both willing and able to work, regardless of whether they are currently working. This means the worker must be eligible to work (at least 16 years of age, not institutionalized, and legally in the country) and willing to work (either currently working or actively seeking employment). A university student with part-time employment would be considered part of the labor force, a university student without employment but actively seeking employment would be considered part of the labor force, but a university student without employment and not seeking employment would not be considered part of the labor force.

Technology

Technology refers to the manner in which inputs can be combined to produce goods and services. Electricity, mass communication methods, improving computer technology and the internet have all been improvements in technology that have made countries better able to produce goods and services; a shift out of the production possibilities frontier.

Consumption Possibilities Frontier (CPF)

The Consumption Possibilities Frontier refers to the line or curve on a graph that represents all the possible maximum combinations of goods and services that a country can consume. If a country remains self-sufficient, its CPF is identical to its Production Possibilities Frontier (PPF). If a country specializes in its comparative advantage and trades with other countries doing the same, the country's CPF will be able to exceed its PPF.

Fair Labor Standards Act (FLSA)

The Fair Labor Standards Act (FSLA) was passed by the U.S. Congress during the Great Depression. This legislation established the first national minimum work age (16 years; with some exceptions), overtime pay for more than 40 hours of work per week for wage workers, and a minimum wage for many workers. This legislation, with amendments added over the intervening years, is still in effect. Amendments have increased the number of workers covered by the minimum wage rules and have increased the minimum wage level.

Production Possibilities Frontier (PPF)

The Production Possibilities Frontier refers to the line or curve on a graph that represents all the possible maximum combinations of goods and services that a country can produce given its current set of resources and technology. To produce on the PPF means a country is using all available resources and technology and is making no production mistakes; this means it is producing at maximum economic efficiency.

Inputs to Production

These are the things used to produce goods and services. Examples would include workers (labor), machinery and tools (capital), a location, timber, steel, fuel (land) and the ideas and risk taking of individuals who start businesses and come up with new product ideas (entrepreneurs).

Goods

These are things that are produced by an economy that can be physically touched. Examples of goods would be cars, TVs, MP3 players, airplanes, apples, bread, books, shoes, and so on.

Services

These are things that are produced by an economy that cannot be physically touched. Examples of services would be care provided by a doctor, actors performing a play for an audience, book keeping provided for a business by an accountant, and so on.

Positive Sum Game

This is terminology from the field of game theory. It refers to any kind of strategic bargaining situation where all 'players' in the game can be made better off. This would be because some outcomes have a greater total payoff so if players can negotiate to get to that outcome, they can all be made better off. The production possibilities frontier model shows that specialization and free trade is a positive sum game where all countries can be made better off relative to where they would be without free trade.

Zero Sum Game

This is terminology from the field of game theory. It refers to any kind of strategic bargaining situation where there is a fixed amount of payoff. This means that the only way one 'player' can be made better off is for at least one other 'player' to be made worse off. Many opponents of free trade may think of free trade, at least at the international level, as a zero-sum game.

Land

When we refer to a country's land resource we are referring not only to the physical space but also to the resources that come from the land: water, timber, metals, minerals and energy.