Exam 3: Interdependence and the Gains From Trade: Part B

Trade can only benefit a nation if that nation has an absolute advantage in the production of that good. ​

Timmy can edit 2 pages in one minute and he can type 80 words in one minute.Olivia can edit 1 page in one minute and she can type 100 words in one minute.Timmy has an absolute advantage and a comparative advantage in editing,while Olivia has an absolute advantage and a comparative advantage in typing.

Trade allows a person to obtain goods at prices that are less than that person's opportunity cost because each person specializes in the activity for which he or she has the lower opportunity cost.

If a country has a higher opportunity cost to produce a good,that means that this country can never possess a comparative advantage in the production of any good.

In one month,Moira can knit 2 sweaters or 4 scarves.In one month,Tori can knit 1 sweater or 3 scarves.Moira's opportunity cost of knitting scarves is lower than Tori's opportunity cost of knitting scarves.

Adam Smith was the author of the 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.

Ellie and Brendan both produce apple pies and vanilla ice cream.If Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream,a mutually advantageous trade can be struck at a price of one apple pie for 1/3 gallon of ice cream.

Specialization and trade can make everyone better off if a person can obtain goods at prices that are less than that person's opportunity cost.

When there are two people and each is capable of producing two goods,it is possible for one person to have a comparative advantage over the other in both goods.

If a person chooses self-sufficiency,then she can only consume what she produces.

For a country producing two goods,the opportunity cost of one good will be the inverse of the opportunity cost of the other good.

Opportunity cost refers to how many inputs a producer requires to produce a good.

It is possible for the U.S.to gain from trade with Germany even if it takes U.S.workers fewer hours to produce every good than it takes German workers.

For international trade to benefit a country,it must benefit all citizens of that country.

Trade between nations is based on absolute advantage,which occurs when a country has a lower opportunity cost of producing a good.

Assume a farmer has the ability to produce corn and/or beans.Whenever the farmer spends 1 hour less producing corn and 1 hour more producing beans,he reduces his output of corn by 2 bushels and raises his output of beans by 3 bushels.In view of these assumptions,the farmer's production possibilities frontier is bowed out.

In an economy consisting of two people producing two goods,it is possible for one person to have the absolute advantage and the comparative advantage in both goods.

The production possibilities frontier (PPF)illustrates the combinations of goods that society can consume when trading with other producers.

When each person specializes in producing the good in which he or she has a comparative advantage,each person can gain from trade but total production in the economy is unchanged.

In most countries today,many goods and services consumed are imported from abroad,and many goods and services produced are exported to foreign customers.