BE

Chapter 3 flashcards

  • Interdependence: Everyday, you rely on people around the world, most of whom you've never met, to provide you with the goods and services you enjoy.

    • Example: US and Japan, two goods: computers and wheat, one resource: labor in hours

    • The US has 50,000 hours of labor per month.

    • One computer requires 100 hours of labor.

    • One ton of wheat requires 10 hours of labor.

 

  • How much of both goods each country produces and consumes.

    • If the country chooses to be self-sufficient.

    • If it trades with the other country.

  • Imports: Goods produced abroad and sold domestically

  • Exports: Goods produced domestically and sold abroad

 

  • Where do gains from trade come from?

    • Absolute advantage: the ability to produce a good using fewer inputs than another producer.

      • The US had an absolute advantage for both wheat and computers (10 hours vs 25 hours for wheat, 100 hours vs 125 hours for computers).

      • 2 countries benefit from trade

        • When each specializes in the good it produces at the lowest cost

    • Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer.

      • Principle of comparative advantage: each good should be produced by the individual who has the smaller opportunity cost of producing that good.

      • (Specialize according to opportunity cost.)

      • Japan has a comparative advantage in computers

    • An absolute advantage is not necessary for a comparative advantage

      • One person can have an absolute advantage in both goods, but cannot have a comparative advantage in both

  • Price of trade: must lie between their opportunity costs

  • Short Term: The period in which we make decisions that reflect our immediate or short-term wants, needs, or limitations.

  • Long Term: The period in which we make decisions that affect our needs, wants, and limitations over a long-term horizon.

  • Types of goods:

    • Consumer goods: produced for current consumption

      • Food

    • Capital goods: help produce other valuable goods

      • Factories

  • Investment does not necessarily have to be toward capital goods

  • Investment can also go toward human capital in the form of college or acquiring more skills.