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Chapter 2

Chapter 2 - ii Numerical Slope = Opportunity Cost • Over...

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Chapter 2 I. Substance A. Positive vs. normative economics Positive- describing the way an economy works; it’s predictive, something that can be tested; it may be T/F (it’s a sunny day today) Normative- talking about the way the economy ought to be; it is not testable but value-based; does not describe the world, rather a function of the speakers value set (it’s a nice, sunny day) Major tool of analysis: graphs- a picture of a relationship B. Read appendix in Ch. 2 C. Opportunity Cost Application: International Trade 1. Questions to Answer If “workers in the US are the most productive in the world,” why do we consume so many imported goods? If “trade can make everyone better off,” why is there so much opposition to it? 2. Tool: Production Possibilities Frontier (PPF) – combination of goods we can produce at a certain time (best displayed in a graph); limit or border of ability to produce stuff i. Efficiency Getting the most possible out of what we put it
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Unformatted text preview: ii. Numerical Slope = Opportunity Cost • Over the passage of time, the ability to produce more stuff • If opportunity cost is zero then we are not being efficient iii. Optimal Point? • Depends on the consumer iv. Economic growth • The ability of an economy to grow and produce goods to reach what once was an unfeasible goal D. How trade can benefit all: An example 1. Assumptions • Two countries: England and Portugal • Two goods: wine, cloth • All workers in a country are equally *productive* • Resources: 100 worker/hours in each country 2. Relevant Concepts • Productivity = output per worker per hour • Absolute Advantage = highest productivity • Comparative Advantage = lowest opportunity cost 3. Autarky: production = consumption 4. Specialization and trade according to Comparative Advantage 5. Conclusion- if trade goes according to comparative advantage, everyone is happy...
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