2. Specialization & Trade

What is absolute advantage?

the ability to produce a good using fewer inputs than another producer

What is comparative advantage?

the ability to produce a commodity at a lower opportunity cost than others

How do you determine absolute advantage?

The producer who can make more of a specific good in the same time has the absolute advantage in that good.

How do you determine comparative advantage?

calculate the opportunity cost of producing each good for each producer. The producer with the lower opportunity cost for a specific good has the comparative advantage in producing that good.

How do you calculate opportunity cost?

(Amount of apples produced) / (Amount of oranges produced) = Opportunity Cost of oranges in terms of apples

What is the Production Possibilities Frontier (PPF)?

a way of mapping what are the feasible production combinations for an economy, so that we can know what are the true possibilities it faces in deciding how much of each commodity to produce

Label A, B and C.

A - Feasible and inefficient

B - Feasible and efficient

C - Infeasible

How do you graph a production possibilities frontier?

label your X and Y axes with two different goods and plot the maximum production of each good on its respective axis

Name 3 thinngs to improve to improve your standard of living.

1. resources

2. productivity

3. terms of trade

What is the formula for standard of living?

standard of living = resources x productivity x terms of trade