6) CH3 Interdependence and the Gains from Trade

Question 1

Why do people produce?

Answer 1

To get something in return.

Question 2

How do we satisfy our wants and needs in a global economy?

Answer 2

• We can be self-sufficient
• We can specialize and trade with the others, leading to economic interdependence.

Question 3

How do ou compute the rate of substitution to produce one more good 2, compared to good 1?

Answer 3

(one more good 2) / (the quantity of good 1 you can produce with the same input necessary to produce good 2)

Thisatio idicaes the rte of tasformation of good 2 into good 1.

Question 4

What does determin difference in the costs of production?

Answer 4

• Who should produce what?
• How much should be traded for each product?

Question 5

How can you measure the difference in the cost of production?

Answer 5

• Number of hours needed to produce 1 unit of output
• The opportunity cost of sacrificing one good for another.

Question 6

What is an absolute advantage?

Answer 6

Being able to produce with the less input (time, money…) possible.

Question 7

What is a comparative advantage?

Answer 7

Being able to produce with a smaller opportunity cost for a good, than an other producer.

Question 8

What advantage is important in order to specialize?

Answer 8

The comparative advantage.

Each partie that has a specific comparative advantage can benefit from the trade.

Question 9

Which authors developped the theory of comparative & absolute advantages?

Answer 9

A. Smith (Wealth of Nation) both

D. Ricardo (Principles of Political Economy and Taxation) comparative advantage.

Question 10

What is importation?

Answer 10

Goods produced abroad and sold domestically.

Question 11

What is exportation?

Answer 11

Goods produced domestically and sold abroad.

Question 12

Summary 1:

Answer 12

• Each person consumes goods and services produced by many other people both in our country and around the world.
• Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.

Question 13

Summary 2:

Answer 13

• There are two ways to compare the ability of two people producing a good.
  
  • The person who can produce a good with a smaller quantity of inputs has an absolute advantage.
  • The person with a smaller opportunity cost has a comparative advantage.

Question 14

Summary 3:

Answer 14

• The gains from trade are based on comparative advantage, not absolute advantage.
• Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage.
• The principle of comparative advantage applies to countries as well as people.