Ch. 2: Trade Offs and Comparative Advantage

Macroeconomics (Econ 201), chapter 2 summary practice for midterm exam

Production Possibilities Frontier

A curve showing the max attainable combinations of two goods that can be produced with available resources and current technology

What does PPF stand for

Productive Possibilities Frontiers

Assumptions of PPF

Countries have a fixed quantity of resources and technology, each country can produce only 2 types of goods or services, resources are identical in productions

Attainable

points inside and outside the PPF

Efficient PPF

Points on the curve

Inefficient PPF

Points below the curve

Shifts in PPF

represent economic growth or recession

Economic growth

the ability of the economy to increase the production of goods and services

A linear PPF

represents constant opportunity costs

curved PPF

indicates changing opportunity costs as production shifts between good

Opportunity Costs

the highest valued alternative that must be given up to engage in an activity

Resource specialization

when a country focuses on producing specific goods or services in which it has a comparative advantage.

Absolute advantage

Ability to produce more than competitors using the same amount of resources

Comparative Advantage

Ability to produce at a lower opportunity cost than competitors