Chapter 3: Interdependence and the Gains from Trade

Flashcards covering key concepts and examples from Chapter 3: Interdependence and the Gains from Trade.

What is opportunity cost?

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

What is absolute advantage?

The ability to produce a good using fewer inputs than another producer.

What is comparative advantage?

The country or individual with the lower opportunity cost of producing a good.

What are exports?

Goods produced domestically and sold abroad.

What are imports?

Goods produced abroad and sold domestically.

Who has the absolute advantage in making apple pies in the example (Sam vs. Bill)?

Bill, because he can make more pies per hour (4 vs. 3) using the same time.

Who has the absolute advantage in making pizza in the example (Doris vs. Courtney)?

Courtney, because she needs less time to make a pizza (15 minutes vs. 20 minutes).

Which country has comparative advantage in clothing and which in cars in the Haiti/Germany example?

Haiti has comparative advantage in clothing; Germany has comparative advantage in cars.

In the USA vs. Mexico milk example, what is USA’s opportunity cost of 1 milk?

4/10 (0.4) units of corn.

In the USA vs. Mexico milk example, what is Mexico’s opportunity cost of 1 milk?

6/8 (0.75) units of corn.

Which country has the lower opportunity cost of producing milk?

USA.

What is France’s opportunity cost of 1 unit of wine?

4/3 units of cheese.

What is Italy’s opportunity cost of 1 unit of wine?

3 units of cheese.

In the Joe shirts and hats example, what is the opportunity cost of a hat?

1/3 shirt.

What does the shape of a typical PPF indicate about opportunity cost when more hot dogs are produced?

The opportunity cost increases as more hot dogs are produced ( bowed-out PPF ).

Who has the absolute advantage in making pizza?

Pat.

Who has the comparative advantage in making pizza?

Pat.

What activities should Kris and Pat do to maximize gains from trade?

Pat should make pizza and Kris should make root beer.

What is the opportunity cost of Pat producing 1 gallon of root beer?

2 pizzas.

What is the opportunity cost of Kris producing 1 gallon of root beer?

1.5 pizzas.

What is the opportunity cost of Kris producing 1 pizza?

2/3 gallon of root beer.

What are the two main concepts that explain gains from trade discussed in this chapter?

Absolute advantage and comparative advantage.