MICRO 1.04

mutual benefits of trade

mutual benefits of trade

when both parties gain or profit from an agreement or exchange

absolute advantage

the ability to produce more of a good or service with a given amount of resources than someone else.

comparative advantage

the ability to produce a good at the lowest opportunity cost.

output problems

focuses on how much can be produced given a set amount of resources. Absolute advantage in production is determined by which country can produce more of a good or service. (i.e, the bigger number) Comparative advantage is found by calculating the per unit opportunity cost using the formula "1st good/2nd good mentioned goes in numerator", with the lowest OC having the comparative advantage.

input problems

focuses on how much of a resource is needed to produce one unit of a particular good or service. Absolute advantage in production is determined by identifying the country that uses the fewest resources (i.e., the lower number). Comparative advantage is established by calculating the per unit opportunity cost using the formula "1st good/other good goes in denominator" The country with the lowest per unit opportunity cost has the comparative advantage.

terms of trade

the precise figures of how much of each good is exchanged

determined by looking at the two opportunity costs and choosing a number that falls between the opportunity costs in order for it to be beneficial to both countries. (i.e, 1 < x < 3, can be 2)