Thinking like an Economist 2 - Lecture 2

These flashcards cover the key concepts of Lecture 2: Thinking like an Economist II, including the history of trade, Absolute and Comparative Advantage, Opportunity Cost, and calculations involving the Production Possibilities Curve.

What is the historical significance of the ochre quarry known as Bookatoo?

It was considered exceptionally high quality and held spiritual importance as the blood of a sacred emu for the Dieri people, who traveled 500 kilometres to barter for it.

According to the transcript, what were the 2023 values for Global Nominal GDP and Global Trade Volume?

Global Nominal GDP was approximately US$118 \text{ Trillion} and Global Trade Volume was approximately US$35 \text{ Trillion}, implying about $30\%$ of global production was traded internationally.

What is the economic definition of the 'Opportunity Cost of a choice'?

It includes the value of the next best alternative use of resources, representing what was given up when choosing to produce one good instead of another.

How is an 'Attainable Bundle' defined on a Production Possibilities Curve (PPC)?

It is any combination of goods that can be produced using currently available resources, represented by all points on, below, or to the left of the PPC.

What characterizes an 'Efficient Bundle' in production?

It is a combination of goods for which available resources do not allow an increase in the production of one good without a reduction in the other, implying resources are fully utilized.

In the Alberto and Bob example, what is Alberto’s Opportunity Cost of producing 1 Pencil ($OC_{Pen}^A$)?

$OC_{Pen}^A = \frac{25 \text{ Erasers/Hour}}{20 \text{ Pencils/Hour}} = 1.25 \text{ Erasers/Pencil}$.

What does the slope of the Production Possibilities Curve (PPC) represent?

The absolute value of the slope is equivalent to the Opportunity Cost of Producing the good on the Horizontal Axis in terms of the good on the Vertical Axis.

How is 'Absolute Advantage' defined?

A person or country has an absolute advantage if it is more productive or efficient, meaning it can produce more of a good with the same amount of inputs compared to others.

What is 'Comparative Advantage'?

A person or country has a comparative advantage in the production of a good if it has a lower opportunity cost of producing that good compared to another party.

What is the 'Principle of Comparative Advantage'?

The principle that every individual or country should specialize in producing the good or service in which it has a comparative advantage and trade for everything else.

Why is it impossible for a person to have a comparative advantage in all goods?

Because the opportunity cost of one good is the mathematical inverse of the opportunity cost of the other (e.g., $OC_{Pen} = \frac{1}{OC_{Era}}$), so if one person has a lower cost for one, the other person must have a lower cost for the other.

What range must the 'Terms of Trade' fall within for both Alberto and Bob to be willing to trade erasers for pencils?

The price must be between their respective opportunity costs, specifically between $0.75 \text{ Pencils/Eraser}$ and $0.8 \text{ Pencils/Eraser}$, to ensure there is a willing buyer and a willing seller.

What are the primary 'Gains from Specialisation and Trade' observed in the lecture's final example?

Both parties are able to consume bundles of goods that lie outside their individual Production Possibilities Curves, meaning they can consume more than they could produce on their own.