Chapter 3: Interdependence and the Gains From Trade – Flashcards
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Trade can make everyone better off, and people face trade offs
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Which principles of economics does this chapter focus on?
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You and other consumers with the goods and services they produce because they get something in return.
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What is the idea of this principle?
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Shows the various mixes of output that an economy can produce
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The production possibilities frontier
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Cause producers to consume all they produce
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What are the effects of choosing to be self sufficient rather that trading?
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When describing the opportunity costs faced by two producers. (The producer who gives up less of other goods to produce good x has the smaller opportunity cost of producing good x and is said to have a comparative advantage in producing it.)
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Comparative advantage
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When comparing the productivity of one person, firm, or nation to that of another. (The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.)
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Absolute advantage
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what we give up to get something
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Opportunity cost
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The trade-off between the two goods that each producer faces
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What does opportunity cost measure?
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Absolute advantage, Comparative advantage
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Although it is possible for one person to have a ____ _____ in both goods, it is impossible for one person to have a ____ _____ in both goods.
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True
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True or False: The opportunity cost of one good is the inverse of the opportunity cost of the other.
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Low
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If the opportunity cost of one good is high, the opportunity cost of the other must be ____.
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Relative opportunity cost
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What does comparative advantage reflect?
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Absolute advantage, comparative advantage
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The gains from specialization and trade are based not on _____ _____ but on ______ ______.
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When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy can rise.
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In terms of comparative advantage, how can total production in the economy rise?
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In terms of the price that each party pays the other.
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What is another way we can look at gains from trade?
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Between the two opportunity costs.
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For both parties to gain from trade, where must the price at which they trade be?
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Interdependence and the gains from trade.
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What does the principle of comparative advantage explain?
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Goods produced abroad and sold domestically
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Imports
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Goods produced domestically and sold abroad
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Exports
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That each good should be produced my the country that has that smaller opportunity cost of producing that good.
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What does the principle of comparative advantage state?
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True, trade can make some individuals worse off, even as it makes the country as a whole better off.
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True or False: international trade can make individuals worse off
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Comparative advantage
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What kind of advantage could an increase in technology result in?
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Linear, assuming technology can be traded between meat and potatoes at a constant rate
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What kind of graph was the PPF between Frank the farmer and Rose the rancher?
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Carl Menger 1871
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Who first presented the idea of limits of economic exchange?
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When individuals have quantities of goods, gains from trade can be incomplete or negative if we trade too little or too much. There is a limit at which full economic gains are reached.
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Limit of economic exchange
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When what you trade is worth as much or more to you as what you stand to gain, trade stops.
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In simple terms when is the limit to exchange reached?
