The Production Possibility Model, Trade, and Globalization

Vocabulary flashcards covering theProduction Possibility Model, trade, globalization, and related concepts from the lecture.

PPC (Production Possibility Curve)

A curve that shows the maximum feasible combinations of two goods that can be produced with a given set of inputs, illustrating trade-offs and opportunity costs.

Production Possibility Model

The framework (table or graph) representing the trade-offs society faces and the potential gains from specialization and trade.

Trade-offs

Compromises that must be made when choosing between alternative goods due to limited resources.

Opportunity Cost

The value or quantity of the next-best alternative forgone when making a choice.

Increasing Opportunity Costs

The principle that the more you concentrate on producing one good, the higher the opportunity cost of additional units; the PPC bows outward.

Guns and Butter

Classic illustration of the trade-off between military (guns) and civilian (butter) goods, used to explain the PPC slope.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than others, which justifies specialization and gains from trade.

Productive Efficiency

Producing the maximum output possible from given inputs; points on the PPC are productive efficient; inefficiency lies below the curve; unattainable points lie outside.

Neutral Technological Change

A technological advance that increases overall capacity without favoring one good over another, shifting the PPC outward in parallel.

Biased Technological Change

A technological advance that favors one good over another, shifting the PPC asymmetrically.

Distribution vs Productive Efficiency

The PPC measures productive efficiency but does not account for how income or goods are distributed; distribution can affect whether a method is viewed as efficient.

Specialization

Focusing production on goods for which one has a comparative advantage to improve overall output.

Benefits from Trade

When countries trade according to comparative advantage, both can consume beyond their no-trade PPCs.

Globalization

The increasing integration of economies, cultures, and institutions worldwide, expanding markets and increasing competition for firms.

Law of One Price

Wages of workers in similar countries should not differ significantly when adjusted for productivity; trade helps align wages across borders.

Exchange Rates and Comparative Advantage

Changes in exchange rates and wage premia affect relative prices and competitive position; depreciation or higher foreign wages can make exports cheaper and imports more expensive.

No-Trade PPC

The idea that without trade, a country is limited to the combinations on its own production possibility curve.