Chapter 2 notes: Models, PPF, comparative advantage, gains from trade, circular flow, and positive vs normative economics

Production Possibilities Frontier (PPF)

A visual representation of all combinations of two goods an economy can produce with given resources and technology.

Feasible vs. Efficient Points (PPF)

Points inside the PPF boundary are feasible but inefficient; points on the boundary are feasible and efficient; points outside are not feasible with current resources/technology.

Opportunity Cost

The slope of the PPF, representing what must be sacrificed to produce one more unit of another good.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer; this drives specialization and gains from trade.

Absolute Advantage

The ability to produce more of a good with the same resources than another producer; typically refers to higher output capacity.

Gains from Trade

The mutual benefit that arises when countries specialize in goods where they have a comparative advantage and then exchange them at mutually beneficial terms of trade.

Autarky

A situation where an economy is self-sufficient and does not engage in international trade.

Terms of Trade

The rate at which one country's goods are exchanged for another country's goods; it must lie between both countries' opportunity costs for trade to be mutually beneficial.

Circular Flow Diagram

A model illustrating the flow of money and goods between households and firms within an economy, through goods/services markets and factor markets.

Positive Economics

Descriptive statements about how the economy actually works, which can be tested against data and involve no value judgments.

Normative Economics

Prescriptive statements about what ought to be done in the economy, which depend on value judgments about desired outcomes and policy goals.

De Minimis Rule

A trade policy rule stating that low-value imports (below a specific threshold) are typically not subject to taxes or extensive customs procedures at the border.