Chapter 3 vocabulary

Chapter 3 vocabulary - o absolute advantage The ability to...

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o absolute advantage The ability to produce a good using fewer inputs than another producer. o comparative advantage The ability to produce a good at a lower opportunity cost than another producer. o exports Goods and services that are produced domestically and sold abroad. o imports Goods and services that are produced abroad and sold domestically. o opportunity cost Whatever must be given up to obtain some item. Chapter Recap: Summary o Each person consumes goods and services produced by many other people both in the United States and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services. o There are two ways to compare the ability of two people in producing a good. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage. o Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage. o The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries. Chapter Recap: Questions for Review 1. Under what conditions is the production possibilities frontier linear rather than bowed out? 2. Explain how absolute advantage and comparative advantage differ. 3. Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage. 4. Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to Question 3.
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5. Will a nation tend to export or import goods for which it has a comparative advantage? Explain. 6.
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Chapter 3 vocabulary - o absolute advantage The ability to...

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