Macroeconomics - chapter 3
Talented people that are the best at everything have a comparative advantage in the production of everything.
F- a low opportunity cost of producing one good implies a high opportunity cost of producing the other good
Self-sufficiency is the best way to increase one's material welfare
F - restricting trade eliminates gains from trade
specialization and trade
trade allows each person to specialize in doing what they do best
opportunity cost
whatever must be given up to obtain some item
If trade benefits one country, its trading partner must be worse off due to trade.
F-voluntary trade benefits both traders
If gains from trade are based solely on comparative advantage, and if all countries have the same opportunity costs of production, then there are no gains from trade.
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If producers have different opportunity costs of production, trade will allow them to consume outside their production possibilities frontiers.
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The gains from trade can be measured by the increase in total production that comes from specialization.
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imports
goods produced abroad and sold domestically
exports
goods produced domestically and sold abroad
If a nation has a comparative advantage in the production of a good,
it can produce that good at a lower opportunity cost than its trading partner.
If a nation has an absolute advantage in the production of a good
it can produce that good using fewer resources than its trading partner.
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer - who ever has the smaller opportunity cost
absolute advantage
the ability to produce a good using fewer inputs than another producer - used when comparing the productivity of one person, firm, or nation to that of another
Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade,
the domestic price of 1 ring is 1/3 of a watch.
Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade,
the opportunity cost of 1 watch is 3 rings.
smaller opportunity cost
the producer who gives up less of other goods to produce Good X
why is Interdependence and trade desirable?
they allow everyone to enjoy a greater quantity and variety of goods and services
According to the principle of comparative advantage,
countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners.
gains from trade
the increase in total production due to specialization by trade
If a country's workers can produce 5 hamburgers per hour or 10 bags of French fries per hour, absent trade, the price of 1 bag of fries is 2 hamburgers.
F - the price of 1 bag of fries is 1/2 hamburger
If an advanced country has an absolute advantage in the production of everything, it will benefit if it eliminates trade with less developed countries and becomes completely self-sufficient.
F - voluntary trade benefits all traders
If Japan has an absolute advantage in the production of an item, it must also have a comparative advantage in the production of that item.
F- absolute advantage compares the quantities of inputs in production while comparative advantage compares the opportunity costs
When a country removes a specific import restriction, it always benefits every worker in that country.
F- it may harm those involved in that industry
Absolute advantage is a comparison based on productivity.
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Comparative advantage is a comparison based on opportunity cost.
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Comparative advantage, not absolute advantage, determines the decision to specialize in production.
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If Germany's productivity doubles for everything it produces, this will not alter its prior pattern of specialization because it has not altered its comparative advantage.
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If a producer is self-sufficient, the production possibilities frontier is also the consumption possibilities frontier.
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