Economic Models: Trade-offs and Trade-Econ 101

ppf

What is the production possibilities frontier (PPF)?

A model that illustrates the trade-offs for an economy that produces only two goods. It shows that maximum quantity of one good that can be produced for any given quantity produced of the other

What are factors of production and what are the four categories?

the resources used to produce goods and services, typically classified into four categories: land, labor, physical capital, and entrepreneurship (human capital).

What is the slope of PPF equal to?

opportunity cost

What is absolute advantage?

the ability of an individual, firm, or country to produce a greater quantity of a good or service than another entity using the same amount of resources.

What is comparative advantage?

the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than another entity, allowing for more efficient resource allocation in trade.

When is an economy efficient?

An economy must produce as much of each good as it can and it must also produce the mix of good that people want to consume and deliver those goods to the right people 

When is an economy inefficient?

If the economy could produce more of some things without producing less of others (which typically means that it could produce more everything)

What happens to the PPF when the opportunity costs are increasing?

it is a bowed-out curve rather than a straight line

What does economic growth mean for an economies production possibilites and how is that shown on the ppf?

 -the economy can produce more of everything

-growth is shown as an outward shift of the frontier

When are countries willing to trade?

- if the price of the good each country obtains in the trade is less than its own opportunity cost of producing the good domestically 

Why does international trade benefit both countries involved?

• Each country can consume more than if it doesn’t trade and remains self-sufficient 

• Mutual gains don’t depend on each country being better than other countries at producing one kind of good

• Even if a one country has an absolute advantage in both industries there are still gains from trade 

What is positive economics?

The branch of economics that analyzes economic phenomena based on facts and objective data.

What is normative economics?

The branch of economic analysis that focuses on value-based judgements

Why is the PPF often curved instead of straight?

Typically, some resources are better suited for producing one good more than another, which means that there are diminishing returns when moving such resources away from producing what they are best suited for.