Interdependence and the Gains from Trade Flashcards
(9 cards)
What does the production possibilities frontier show?
The various mixes of output that can be produced by each individual.
What happens to consumption without trade between the farmer and gardener?
Each consumes what they produce, leading to diminished economic gains.
What is suggested for specialization in this parable?
The gardener should only produce potatoes, leading to a production of 32 kg, while trading with the farmer for meat.
How does trade expand consumption opportunities?
By allowing individuals to specialize in what they produce best and then exchange goods with others.
What is absolute advantage?
it refers to when one producer can produce more of a good than another producer using the same amount of resources.
Who has an absolute advantage in producing both meat and potatoes in this scenario?
The farmer, as he requires less time than the gardener for producing either good.
What is comparative advantage?
It refers to when a producer can produce a good at a lower opportunity cost compared to another producer.
Who has a comparative advantage in producing potatoes according to this parable?
The gardener, as he has a lower opportunity cost for potatoes compared to the farmer’s opportunity cost for producing them.
How do differences in opportunity costs create gains from trade?
When potential trading parties have different opportunity costs, each can benefit by specializing in what they do best and trading with one another.
