mid-term 2 c

Absolute Advantage

the comparison among producers of a good according to their productivity

Opportunity Cost

whatever must be given up to obtain some item

Comparative Advantage

the comparison among producers of a good according to their opportunity cost.

Imports

goods and services produced abroad and sold domestically.

Exports

goods and services produced domestically and sold abroad.

Summary

-Each person consumes goods and services produced by many other people, both in our country and around the world. Interdependence and trade are desirable b/c they allow everyone to enjoy a greater quantity and varitey of goods and services.

-There are 2 ways to compare the ability of 2 ppl in producing a good. The personwho can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage.

-Trade makes everyone better off b/c it allows ppl to specialize in those activities in which they have a comparative advantage.

-The principle of comparative advantage applies the countries as well as to ppl. Economists use the principle of comparative advantage to advocate free trade among countries.

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Explain how absolute advantage and comparative advantage differ.

Absolute advantage: The comparison among producers of a good according to their productivity.
Comparative advantage: the comparison among producers of a good according to their opportunity cost.

Give a example in which one person has an absolute advantage in doing something but another person has a comparative advantage.

A country that has coal would have absolute advantage over a country that does not have coal.
A farmer that can produce more meat and potatoes than his neighbour would have comparative advantage.

Is absolute advantage or comparative advantage more important for trade? Explain your reasoning.

Comparative advantage is more important for trade. when you produce the good in which you have comparative advantage total production in the economy rises, and this can be used to make everyone better off.

Will a nation tend to export or import goods for which it has comparative advantage? Explain.

Export. by exporting what you have a comparative advantage in both countries get more of each good.

Why do economists oppose policies that restrict trade among nations?

b/c citizens have different interest.