Economics 102: Macroeconomics Ch 2. Comparative Advantage, Specialization and Exchange

Comparative Advantage

• when a person or a nation has a lower opportunity cost in the production of a good

• everyone has something they can produce at a lower opportunity cost than others

The Law of Comparative Advantage

• a person or nation should specialize in the good they can produce at the lowest opportunity cost

• everyone has something they can produce at a lower opportunity cost than others, and by trading with others, everyone is better off

Absolute Advantage

• being able to produce more of a good or service with the same amount of resources

• able to produce it more cheaply than anyone else

Theory of Comparative Advantage

based on lower opportunity cost NOT absolute advantage

A person or nation that has a comparative advantage in the production of a good, should _____.

1. automatically has an absolute advantage

2. have the highest opportunity cost

3. decrease their production of that good

4. not specialize in the production of that good

5. specialize in the production of that good

specialize in the production of that good

If Sally can produce 1 term paper or 4 cookies in one hour, and Adam can produce 2 term papers or 1 cookie in the same amount of time, which of these statements is true?

1. Sally uses more resources to produce cookies than she does to produce term papers.

2. Sally has a comparative advantage in cookies, while Adam has a comparative advantage in term papers.

3. Both Sally and Adam have the same opportunity costs for these two goods.

4. Adam has a comparative advantage in cookies, while Sally has a comparative advantage in term papers.

5. Adam uses more resources to produce term papers than he does to produce cookies.

Sally has a comparative advantage in cookies, while Adam has a comparative advantage in term papers.

Country A can either produce 10 cars or 10 computers, while country B can produce either 4 cars or 8 computers.

1. Based on this information, which of the following comparisons is TRUE?

2. Country A has no advantage in computers.

3. Country B has a comparative advantage in computers.

4. Country A has no advantage in cars.

5. Country A has a comparative advantage in computers.

Country B has a comparative advantage in computers.

According to the Law of Comparative Advantage, where should a good be produced?

1. In the country with the highest absolute advantage

2. Where opportunity costs are the highest

3. Where prices are the highest

4. Where opportunity costs are the lowest

5. Where there are more consumers

Where opportunity costs are the lowest

Which of the following are problems that all economies face?

1. How to shrink the money supply, and how to increase opportunity costs for everyone equally.

2. How to decide what goods and services to produce, how much to produce, and for whom to produce, and how to increase opportunity costs for everyone equally.

3. How to use scarce resources to satisfy unlimited wants, and how to shrink the money supply.

4. How to use scarce resources to satisfy unlimited wants.

5. How to use scarce resources to satisfy unlimited wants, how to decide what goods and services to produce, how much to produce, and for whom to produce.

How to use scarce resources to satisfy unlimited wants, how to decide what goods and services to produce, how much to produce, and for whom to produce.

Theory of Comparative Advantage

nations should specialize in the production of the goods in which they have the lowest opportunity cost, and trade with other nations

Absolute Advantage

The United States can produce more strawberries with the same amount of resources than Canada can

Benefits of Specialization

• a larger quantity of goods and services can be produced

• improved productivity

• a nation can produce beyond its production possibility curve

• resources will be used more efficiently

According to the two production possibility curves shown, Country A should specialize in the production of which of the following?

1. Both corn and wheat.

2. Wheat

3. Corn

4. Neither corn nor wheat.

The United States can produce 20 strawberries or 80 apples, while Canada can produce 15 strawberries or 5 apples. Which of the following describes what will happen if these two countries trade with each other?

1. Canada will benefit, but the US will not.

2. The United States will benefit, but Canada will not.

3. Neither country will benefit from trading.

4. Both countries will benefit from trading.

Both countries will benefit from trading.

Country A's opportunity cost of producing 1 ton of corn is 5 tons of wheat, while Country B's opportunity cost of producing 1 ton of corn is 1/3 of a ton of wheat. Which of the following statements is true?

1. Country A should specialize in producing corn, while Country B should specialize in producing wheat.

2. There will be no gains from trade if these two countries exchange goods.

3. Country B should specialize in producing corn, while Country A should specialize in producing wheat.

4. Both countries should produce both goods.

Country B should specialize in producing corn, while Country A should specialize in producing wheat.

When countries specialize in the goods in which they have a comparative advantage, which of the following is true?

1. Both countries will experience gains from trade.

2. Production costs will increase for both countries.

3. One country is usually better off, and the other is worse off.

4. Both countries are worse off.

Both countries will experience gains from trade.

Which of the following is NOT a benefit of specialization and exchange?

1. Larger quantities of goods and services can be produced.

2. Resources can be used more efficiently.

3. A country can produce beyond its production possibility curve.

4. Taxes will be reduced.

Taxes will be reduced.