Econ theme 4

Question 1

What is the definition of absolute advantage?

Answer 1

Absolute advantage is the ability of an individual, company, or country to produce more of a good or service with the same amount of resources than another entity.

Question 2

Fill in the blank: Absolute advantage focuses on the ________ of production.

Answer 2

efficiency

Question 3

Who is the economist associated with the concept of absolute advantage?

Answer 3

Adam Smith

Question 4

What does it mean for a country to have an absolute advantage in a particular good?

Answer 4

It means that the country can produce more of that good using same resources than another country.

Question 5

Multiple Choice: Which of the following best describes absolute advantage? A) Producing at a lower opportunity cost B) Producing more with the same resources C) Trading goods internationally

Answer 5

B) Producing more with the same resources

Question 6

What is the primary benefit of absolute advantage?

Answer 6

Increased efficiency in production and potential for higher output.

Question 7

What is a key limitation of the absolute advantage theory?

Answer 7

It does not consider opportunity costs in production.

Question 8

Multiple Choice: Which scenario illustrates absolute advantage? A) Country A can produce 10 cars with 5 workers, while Country B can produce 5 cars with the same number of workers. B) Country A can produce 5 cars with 3 workers, while Country B can produce 4 cars with 2 workers.

Answer 8

A) Country A can produce 10 cars with 5 workers, while Country B can produce 5 cars with the same number of workers.

Question 9

Who benefits from trade based on absolute advantage?

Answer 9

Both countries involved in the trade can benefit by specializing in the production of goods where they have an absolute advantage.

Question 10

What is the relationship between absolute advantage and specialization?

Answer 10

Countries tend to specialize in the production of goods for which they have an absolute advantage.

Question 11

Fill in the blank: The concept of absolute advantage supports the idea of ________ in international trade.

Answer 11

specialization

Question 12

What happens to production efficiency when countries specialize based on absolute advantage?

Answer 12

Production efficiency increases as resources are allocated to their most productive uses.

Question 13

What role does technology play in absolute advantage?

Answer 13

Technology can enhance a country’s absolute advantage by increasing the efficiency of production.

Question 14

Multiple Choice: Which of the following can diminish a country’s absolute advantage? A) Improved technology in another country B) Increased resource costs C) Both A and B

Answer 14

C) Both A and B

Question 15

What is the impact of absolute advantage on domestic production?

Answer 15

It encourages domestic producers to focus on goods they can produce more efficiently.

Question 16

Comparative advantage

Answer 16

When a country can produce a good with a lower opportunity cost than another country

Question 17

benefits of specialisation and trade

Answer 17

-lower prices
-more choice (consumers and firms)
-economies of scale
-higher standard of living
-increased competition
-spread of tech and new ideas
-scept

Question 18

financial markets

Answer 18

Places where buyers and sellers trade financial assets (shares)

Question 19

costs of specialisation and trade

Answer 19

-risk of current account deficit
-export dependence
-increased exposure to external shocks
-structual unemployment
-global monopolies
-infant industries unable to compete
-aggressive, anti-competitive prices

Question 20

Comparative advantages laws

Answer 20

-constant returns to scale
-ignores transport cost
-ignores barriers to trade
-perfect mobility of FOP between different uses
-externalities ignored

Question 21

limitations of the law of comparative advantage

Answer 21

-free trade not necessarily fair trade (rich countries exert monopsony power to force producers in developing countries to accept low prices)
-law of comparative advantage is based on unrealistic assumptions
-if OC were the same, there would be no benefit from specialisation and trade

Question 22

Terms of Trade formula

Answer 22

(index of export prices/ index of import prices) x 100

Question 23

factors influencing country’s TOT

Answer 23

-country’s rate of inflation relative to other countries
-country’s produciviyt relative to that of other countries
-tariffs
-country’s exchange rate

Question 24

effect of increase in TOT

Answer 24

-higher living standards =country can import more for a given quantity of exports
-deterioraion in CA of the balance of payments = cause decline in competitiveness of products

Question 25

Role of Financial Markets (Facilitate saving)

Answer 25

-provide an opportunity for individuals/ firms to save money -put money in a bank (get IR on it) -put money into a pension fund (can access when you're older)

Question 26

Role of Financial Markets (Facilitate Lending)

Answer 26

-Lend money to businesses/individuals who need more cash -personal/business loan from a bank (pay IR when you pay back) -mortgage for a house

Question 27

Role of Financial Market (Facilitate exchange)

Answer 27

-Provide opportunity for individuals/firms to exchange -having bank account to transfer money to friends/pay for g/s -makes it easier for trade

Question 28

Role of Financial Markets (Provide market for equity)

Answer 28

- Provide market in which equity can be bought and sold -businesses sell a percentage of their company to investors who want a share of companies profits so they dont have to pay IR on a loan - sell their company in shares and raise money to invest - businesses will go to an international bank so they can sell the shares for them to willing investors (providing equity market)

Question 29

Role of Financal Market (provide forward markets)

Answer 29

forward contracts - contract that guarantees that a trade happens at a later date at a certain place - fixed price + future date of future transaction - used usually for commodities/currencies (they have price instability) -businesses ask bank to create forward contract as its complicated

Question 30

Financial Crisis

Answer 30

bonuses/profits 2. Decide to start givng out subprime mortages (loans issued to borrowes with low credit card ratings carrying a hiigh IR) 3.House prices shoot up 4. creating housing bubble (steep run up in house prices, and that 'bursts' when what is driving demand collapses, leaving a high supply of houses leading to decline in house prices) 5 . 2008 - american economy collapses banks lose lots of money 6. global effects

Question 31

subprime mortgages - adjustable rates

Answer 31

-teaser rate = 1% IR for one year then 5% for the next 10 yrs - would help with getting high risk borrowers getting loans and then bank gets lots of money in the future - borrowers fooled by 'teaser rates' and the asymmetric information (banks knew they would increase IR a lot and borrowers didn't)

Question 32

Financial Crisis = win-win formula

Answer 32

- bankers selling their subprime mortgages with adjustable rates - they got high IR rate back from those repayments - or if the borrowers defaulted the bank got the house and with the increasing house prices they would even get profit - so banks could not lose with this scheme

Question 33

Financial Crisis - the Housing bubble

Answer 33

- so increase in house prices( if borrowers defualt higher profit for bankers) - so banks sell more of these subprime mortgages = more demand for houses = inflation in house prices (cycle) -by 2007 house prices doubled so homeowners worried about crashing prices started selling -this increase in supply decreased prices - so more homeowners were selling their houses - house prices plummented - bubble popped

Question 34

Financial crisis - housing bubble popped

Answer 34

would lose money when someone defaulted on their mortgage - now that years have passed the teaser rates of some of the subprime mortgages were jumping up to very high IR so more ppl defaulting on them -- banks lost lots of money -since banks were connected to other banks globally everyone felt the devastating effects -lehman brothers = bankrupt -banks couldnt loan money = businesses had to cut costs = increase in unemployement -gov. had to step in and give financial support

Question 35

Types of financial market failure

Answer 35

1. Asymmetric information 2. Speculation and market bubbles 3. Negative externalites 4. Moral hazard

Question 36

Market failure - Asymmetric information

Answer 36

-when one party knows more than another in a transaction -e.g. bankers selling subprime mortgages with adjustable rates -financial regulators, monitor banks but didnt realise what banks were during before GFC as banks would complicate and repackage these deals

Question 37

absolute poverty

Answer 37

unable to afford basic necessities like food, clean water, shelter

Question 38

measuring absolute poverty

Answer 38

the world bank measures it - poverty line at $2.15 a day (2017 prices) adjusted for PPP

Question 39

relative poverty

Answer 39

relatively poor compared to the rest of your country

Question 40

measuring relative poverty (UK)

Answer 40

below 60% of the median household income in your country

Question 41

What does the Gini coefficient measure?

Answer 41

Income inequality within a population.

Question 42

What is the range of the Gini coefficient?

Answer 42

0 to 1, where 0 represents perfect equality and 1 represents perfect inequality.

Question 43

What is the formula for calculating the Gini coefficient?

Answer 43

G = A / (A + B), where A is the area between the line of equality and the Lorenz curve, and B is the area under the Lorenz curve.

Question 44

What is the Lorenz curve?

Answer 44

A graphical representation of income distribution.