1.3 Comparative Advantage and Gains from Trade

• Opportunity cost determines a country's comparative advantage.


  True
• Comparative advantage is determined by the opportunity cost of production
• Match the concept with its defining factor:

  Absolute Advantage ↔️ Quantifiable output using same resources

  Comparative Advantage ↔️ Opportunity cost of production
• Absolute advantage is the ability to produce more of a good using the same resources
• Why does the PPF slope downward?

  Opportunity cost of production
• Opportunity cost is the value of the next best alternative given up when making a choice.

  True
• Countries can benefit from trade by specializing in their comparative advantage.
• Alpha has a comparative advantage in wheat because it has a lower opportunity cost of production.
• Steps involved in illustrating comparative advantage using the PPF

  1️⃣ Define the PPF for two countries

  2️⃣ Calculate the opportunity costs

  3️⃣ Identify comparative advantages

  4️⃣ Show how specialization and trade increase consumption
• Beta has a comparative advantage in cloth because its opportunity cost of wheat is lower.

  False
• Match the country with its comparative advantage:

  Alpha ↔️ Wheat

  Beta ↔️ Cloth
• Country A has a comparative advantage in wheat if it can produce 10 tons of wheat or 5 cars.

  True
• Specialization allows countries to produce goods more efficiently.


  True
• Specialization leads to lower production costs.


  True
• Comparative advantage arises from lower opportunity costs.


  True
• Comparative advantage focuses on opportunity costs rather than quantifiable output.


  True
• Comparative advantage exists when a country can produce a good at a lower opportunity cost
• What is the definition of absolute advantage?

  Ability to produce more
• Order the steps to determine comparative advantage in a scenario:

  1️⃣ Calculate the opportunity cost for each country

  2️⃣ Compare the opportunity costs

  3️⃣ Identify which country has a lower opportunity cost for each good
• Specialization and trade based on comparative advantage benefit all parties involved.

  True
• Match the country with its opportunity cost of wheat:

  Alpha ↔️ 0.5 meters of cloth

  Beta ↔️ 1 meter of cloth
• Order the steps to illustrate comparative advantage using the PPF:

  1️⃣ Draw the PPF for each country

  2️⃣ Calculate the opportunity cost for each country

  3️⃣ Identify the comparative advantage for each good

  4️⃣ Show how specialization and trade lead to gains
• What does the Production Possibilities Frontier (PPF) illustrate?

  Maximum production combinations
• Specialization and trade allow countries to consume beyond their individual PPFs.


  True
• Alpha produces 20 tons of wheat using the same resources as Beta produces 15 tons.
• Alpha's opportunity cost of wheat is 0.5 meters of cloth.
• Gains from trade occur when countries specialize in producing goods where they have a comparative advantage.
• Gains from trade occur when countries specialize in goods where they have a comparative advantage.
• Gains from specialization and trade occur when countries focus on producing goods where they have a comparative advantage.
• The concept of opportunity cost is key to understanding comparative advantage.
• The ability to produce more of a good using the same resources is called absolute advantage.
• What is the definition of opportunity cost?

  Value of next best alternative
• Match the concept with its definition:

  Opportunity Cost ↔️ Value of the next best alternative given up

  Comparative Advantage ↔️ Produce a good at a lower opportunity cost
• Country A has a comparative advantage in wheat if it can produce wheat at a lower opportunity cost than Country B.

  True
• What role does opportunity cost play in determining comparative advantage?

  It determines comparative advantage
• What does the Production Possibilities Frontier (PPF) illustrate?

  Maximum combinations of two goods
• By specializing and trading, countries can consume beyond their individual PPFs
• What is the key difference between absolute advantage and comparative advantage?

  Opportunity cost
• Countries must have an absolute advantage in a good to benefit from trade.

  False
• What is the primary purpose of the Production Possibilities Frontier (PPF)?

  Shows maximum production combinations