Chapter 3: Comparative Advantage & Gains from trade

Question 1

Comparative advantage

Answer 1

produce a good at a lower opportunity cost than someone else
summary,
- When there exists comparative advantage each individual should specialize in the production of the good in which they have comparative advantage.
- They should trade with each other
- There’ll be gains from trade for both
**in a test/exam, we’ll assume when a firm specializes in the production of a good, it produces only that good! not realistic
- if economy doesn’t have comparative advantage, same opportunity costs, there will be no trade (nothing to gain)

Question 2

A note about prices

Answer 2

slides 21 to 22

Question 3

Absolute advantage… describes the productivity of 1 person, firm or nation compared to another

Answer 3

… you can produce a given quantity of a good using fewer inputs than someone else OR.. using the same number of inputs, you can produce more than someone else…
Productivity = quantity produced/number of inputs used

Question 4

Productivity

Answer 4

quantity produced/number of inputs used

Question 5

Absolute advantage is not linked to comparative advantage

Answer 5

looking at labour time as a resource (example)

Side note: NOTE: Even though Aaron has an absolute advantage in both goods, because there exists comparative advantage, there are still gains to be made from trade, as we have seen.

Question 6

test yourself….

Answer 6

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