ECO 2013 LS Chapter 2: Specialization and Exchange

When individuals seek to make a profit and specialize according to their comparative advantage, we could say that the system operates as though there was

an invisible hand.

When producers specialize in making a particular good according to their comparative advantage, total production possibilities

are greater than if each produced the combination of goods they themselves want to consume.

The functioning of the invisible hand depends on some assumptions, such as

free competition and full information.

When you lose comparative advantage in one thing you (blank) it in another thing.

gain

When specialized producers exchange goods and services, outcomes improve because of

gains from trade.

When a producer has an absolute advantage they can

generate more output than others with a given amount of resources.

The slope indicates the

direction of the relationship and the strength.

Points along the production possibilities frontier are attainable and

efficient.

If each country focuses on producing the good for which it has a comparative advantage, total production (increases/decreases).

increases

The opportunity cost of producing one good in terms of the other typically (increases/decreases) as more of a good is produced because skills vary among workers.

increases

Points inside the production possibilities frontier are attainable and

inefficient.

The first question economists use to break down problems: "What are the wants and constraints of those involved?" can be answered using the

production possibilities frontier.

Slope is the

rate at which the y variable changes when the x variable changes.

The slope of a production possibility frontier between two points is the (blank) of the difference in the vertical distances and the horizontal distances of the points from the origin.

ratio

The simple way to determine the slope is

rise/run.

When people trade, everyone gets more of the things they want than they would if they were self-sufficient. In this way, trade can be driven entirely by

self-interest.

When the population increases, the production possibilities frontier

shifts outward.

Gains from trade refer to the improvement in outcomes that occurs when producers (blank) and exchange goods and services.

specialize

Grains from trade refer to the improvement in outcomes that occurs when producers (blank) and exchange goods and services.

specialize

If each country focuses on producing the good for which it has a comparative advantage, the country would

specialize in production of that good.

In the nineteenth century, the United States gained comparative advantage in clothing manufacturing through a combination of new (blank) and cheap (blank).

technology / labor

The two main factors that drive the change in the U.S. production possibilities are

technology and number of workers.

The slope of a function is constant when

the relationship is linear.

A country has a comparative advantage over another country if they can produce

the same amount of a good as the other country but at a lower opportunity cost.

The production possibilities frontier helps us answer the second economists' question: "What are the trade-offs?", because

there is a trade-off between the production of the two goods.

In the nineteenth century, the United States snatched the comparative advantage in clothing

through a combination of new technology and cheap labor.

The rise is the change in the (blank) direction, whereas the run is the change in the (blank) direction.

y-axis / x-axis

Given two points (2,3) and (3,5); the slope between the two points is (blank).

2

Suppose country A can produce 50 shirts or 200 bushels of wheat; and country B can produce 25 shirts or 50 bushels of wheat. The opportunity cost of making a shirt for country B is

2 bushels of wheat.

Given two points (2,4) and (4,10); the slope between the two points is (blank).

3

Who is credited with first using the term 'invisible hand' to describe this coordinating mechanism?

Adam Smith

True/False Points inside the production possibilities frontier are achievable, but still make full use of all available resources.

False

The production possibilities frontier helps us answer the first economists' question: "What are the wants and constraints of those involved?", because it shows

all possible combinations of outputs that can be produced with ideal resources.

(blank) increases total production, using the same number of workers and the same technology.

Specialization

True/False A country can have a comparative advantage without having an absolute advantage.

True

True/False No producer has a comparative advantage at everything, and each producer has a comparative advantage at something.

True

A country has a(n) (blank) advantage over another country in product A if it can make more of product A than another country with a given amount of resources.

absolute

The production possibilities frontier shows all the possible combinations of outputs that can be produced using

all available resources.

If a country can make a good at a lower opportunity cost than another country, that country has a(n)

comparative advantage.

Unlike the slope of a curve, the slope of a line is (blank).

constant

The production possibilities frontier gives us a way to represent the (blank) on production.

constraints

There is room for trade as long as the two countries

differ in their opportunity costs to produce a good and they set a trading price that falls between those opportunity costs.

Based on the assumption of efficiency, we can predict that an economy will choose to produce at a point

on the frontier rather than inside it.

A problem with specialization is that each producer may end up with (blank) good.

one

Along a straight line production possibilities curve, the slope of the line measures the (blank) cost of one good in terms of he other.

opportunity

The (blank) cost of one good is the amount of the other good that must be given up to produce it.

opportunity

When the production possibilities frontier is convex,

opportunity costs are increasing.

Points that lie (blank) the production possibilities frontier are unattainable.

outside

When technology improves the production of one good, the production possibilities frontier (blank).

pivots outward

The production possibilities frontier shows the

production constraint of two outputs that can be produced using all available resources.