Chapter 2: The Production Possibility Model, Trade, and Globalization

Vocabulary flashcards covering key concepts from Chapter 2: the Production Possibility Model, trade, and globalization.

Production Possibility Model

A framework showing the trade-offs society faces when choosing how to allocate finite resources between two or more goods, presented as a table or PPC.

Production Possibility Curve (PPC)

A curve representing the maximum output combinations possible with given inputs; bowed outward to reflect increasing opportunity costs; derived from a production possibility table.

Opportunity Cost

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

Increasing Opportunity Costs

The principle that the cost of extra units rises as more of a good is produced because resources are not equally suited to all tasks; PPC bows outward.

Guns and Butter

A classic example illustrating the trade-off between military spending and civilian goods and the resulting PPC trade-offs.

Comparative Advantage

The ability of a producer to produce a good at a lower opportunity cost than others, providing a basis for advantageous trade.

Efficiency (Productive Efficiency)

Producing the maximum output possible from given inputs; points on the PPC boundary.

Inefficiency

Producing less than the maximum output from given inputs; points inside the PPC.

Unattainable

Points outside the PPC that cannot be reached with current resources and technology.

Neutral Technological Change

Technological progress that increases the productivity of all inputs or both goods equally, shifting the PPC outward.

Biased Technological Change

Technological progress that favors one good over another, shifting the PPC more for one good than the other.

Trade and Specialization

Countries or individuals focusing on producing goods with a comparative advantage and trading for others to raise total output.

Consumption with Trade

The ability to consume beyond a country’s own production possibilities by engaging in trade.

The Benefits from Trade

When countries trade according to comparative advantage, both can reach higher levels of consumption than without trade.

Bowed-Out PPC

The PPC shape reflecting increasing opportunity costs; the curve bends outward from the origin.

Globalization

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

The Law of One Price

Wages of comparable workers across countries tend to equalize due to global competition and trade.

Exchange Rates and Comparative Advantage

Exchange rate movements affect the relative prices of exports and imports, influencing where a country has a comparative advantage and potentially altering wage premia.

U.S. Textile Production and Bangladesh

Historical shift where cheaper labor in Bangladesh changed relative advantage in textiles, yielding higher Bangladeshi wages and lower cloth prices for U.S. consumers.

Globalization’s Effect on Firms

Positive: access to larger markets; Negative: more competitors.

Distribution vs Production Efficiency

The PPC analyzes productive efficiency but not how income is distributed; production methods can affect welfare through distribution.

Gains from Trade (Consumption Beyond PPC)

Through specialization and trade based on comparative advantage, countries can consume beyond their own PPC.

Growth and Per Capita Income

Over long periods, specialization and trade contribute to growth in per-capita income and total output.