1.4 Comparative Advantage and Trade

    Cards (20)

    • Absolute advantage refers to the ability of an entity to produce more of a good or service than another entity using the same amount of resources
    • If Country A can produce 100 units of wheat with the same resources that Country B uses to produce 80 units, Country A has an absolute advantage in wheat production.
    • Comparative advantage refers to the ability of an entity to produce a good or service at a lower opportunity cost
    • What is the formula to calculate the opportunity cost of producing good X?
      \frac{\text{Amount of Y given up}}{\text{Amount of X produced}}</latex>
    • Absolute advantage is determined by quantity of output, while comparative advantage is determined by opportunity cost.
    • Opportunity cost is the value of what is given up when choosing one alternative over another
    • What is the formula to calculate opportunity cost?
      Value of what is given upValue of what is gained\frac{\text{Value of what is given up}}{\text{Value of what is gained}}
    • If attending a college class costs $50 in tuition and $45 in lost income, the opportunity cost of attending the class is $95.
    • Gains from trade refer to the economic benefits derived from engaging in international or domestic trade
    • Steps of how gains from trade are achieved
      1️⃣ Specialization
      2️⃣ Efficiency
      3️⃣ Wider Choice
      4️⃣ Lower Prices
      5️⃣ Economic Growth
    • If Country A specializes in wheat and Country B in textiles, they can both enjoy more of both goods at lower costs through trade.
    • Comparative advantage refers to the ability to produce a good or service at a lower opportunity cost
    • What is the formula to calculate opportunity cost for comparative advantage?
      Amount of Y to give upAmount of X produced\frac{\text{Amount of Y to give up}}{\text{Amount of X produced}}
    • If Country A and Country B have the same opportunity costs for producing wheat and cars, neither has a comparative advantage.
    • Specialization is one of the key reasons for gains from trade
    • Benefits of trade from specialization
      1️⃣ Wider Choice
      2️⃣ Lower Prices
      3️⃣ Economic Growth
    • The comparative advantage theory assumes no transport costs or economies of scale.
    • What is one limitation of the comparative advantage theory regarding income inequality?
      Trade benefits may not be even
    • Real-world applications of comparative advantage include international trade agreements
    • The comparative advantage theory may lead to unequal income distribution and environmental degradation.
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