Countries benefit when they specialize in producing goods for which they have a comparative advantage and engage in trade for other goods. International trade is the exchange of capital, goods, and services across international borders or territories. Trading-partners reap mutual gains when each nation specializes in goods for which it holds a comparative advantage and then engages in trade for other products.

In other words, each nation should produce goods for which its domestic opportunity costs are lower than the domestic opportunity costs of other nations and exchange those goods for products that have higher domestic opportunity costs compared to other nations. International Trade : Countries benefit from producing goods in which they have comparative advantage and trading them for goods in which other countries have the comparative advantage.

To summarize, international trade benefits mostly all incumbents and generates substantial value for the global economy. The production possibility frontier shows the combinations of output that could be produced using available inputs. In economics, the production possibility frontier PPF is a graph that shows the combinations of two commodities that could be produced using the same total amount of the factors of production.

It shows the maximum possible production level of one commodity for any production level of another, given the existing levels of the factors of production and the state of technology. PPFs are normally drawn as extending outward around the origin, but can also be represented as a straight line.

An economy that is operating on the PPF is productively efficient, meaning that it would be impossible to produce more of one good without decreasing the production of the other good. For example, if an economy that produces only guns and butter is operating on the PPF, the production of guns would need to be sacrificed in order to produce more butter. If production is efficient, the economy can choose between combinations i. Production Possibilities Frontier : If production is efficient, the economy can choose between combinations on the PPF.

Point X, however, is unattaible with existing resources and technology if trade does not occur. If the economy is operating below the curve, it is operating inefficiently, because resources could be reallocated in order to produce more of one or both goods without decreasing the quantity of either.

Points outside the curve are unattainable with existing resources and technology if trade does not occur with an outside producer. The PPF will shift outwards if more inputs such as capital or labor become available or if technological progress makes it possible to produce more output with the same level of inputs.

An outward shift means that more of one or both outputs can be produced without sacrificing the output of either good. Conversely, the PPF will shift inward if the labor force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital.

Without trade, each country consumes only what it produces.

notebook guide gains from trade answer key

In this instance, the production possibilities frontier is also the consumption possibilities frontier. Trade enables consumption outside the production possibility frontier. This shows that in a free trade system, the absolute quantity of goods available for consumption is higher than the quantity available under autarky. A country has an absolute advantage in the production of a good when it can produce it more efficiently than other countries.

Absolute advantage refers to the ability of a country to produce a good more efficiently than other countries. In other words, a country that has an absolute advantage can produce a good with lower marginal cost fewer materials, cheaper materials, in less time, with fewer workers, with cheaper workers, etc. Absolute advantage differs from comparative advantage, which refers to the ability of a country to produce specific goods at a lower opportunity cost.

A country with an absolute advantage can sell the good for less than a country that does not have the absolute advantage. For example, the Canadian economy, which is rich in low cost land, has an absolute advantage in agricultural production relative to some other countries. China and other Asian economies export low-cost manufactured goods, which take advantage of their much lower unit labor costs. China and Consumer Electronics : Many consumer electronics are manufactured in China.

China can produce such goods more efficiently, which gives it an absolute advantage relative to many countries. Imagine that Economy A can produce 5 widgets per hour with 3 workers. Economy B can produce 10 widgets per hour with 3 workers. Assuming that the workers of both economies are paid equally, Economy B has an absolute advantage over Economy A in producing widgets per hour.

This is because Economy B can produce twice as many widgets as Economy B with the same number of workers. Absolute Advantage : Party B has an absolute advantage in producing widgets. It can produce more widgets with the same amount of resources than Party A.Test Preparation and Review.

Economic Resource Links. Sample Study Guide Chapter. Macroeconomic Data Chart. Economists study how people make purposeful choices with scarce resources. An arrangement by which economic exchanges between people takes place is called a choice. Which of the following represents the alternative choices of goods that the economy can produce? Opportunity costs Economic interactions Budget constraints Production possibilities The value of the alternative that was not chosen is called the marginal cost of the choice.

Exchange of goods and services between people or firms in different nations is called intranational trade. When one person or group of people can produce one good relative to another good with comparatively less time, effort, or resources than another person can produce that good, this is called comparative advantage.

notebook guide gains from trade answer key

The production possibilities curve slopes downward and is bowed out from the origin. Points outside the production possibilities curve are efficient. Economic growth causes a n inward shift in the production possibilities curve. Which of the following is not one of the essential questions that an economy focuses on? What are the goods and services to be produced?

When are the goods and services to be produced? How are the goods and services to be produced? For whom are the goods and services to be produced? Which of the following is not one of the characteristics of a market economy? Freely determined prices Property rights Competitive markets Centrally planned production The costs of buying and selling are called transaction costs. Which of the following is not one of the important roles of prices in a market economy?This course will introduce students to economic issues, tools that economists use to analyze these issues, and the associated public policy concerns.

First, we will review economics in general and some of the tools of economists. Using these tools, we will overview how markets work and examine some economic problems. We will address national incomes and measurement in the macroeconomy so that we may monitor developments in the economy as a whole. Next, we will describe the forces that in the long-run determine key variables, including growth in GDP, saving, investment, real interest rates, and unemployment.

In the last major section of our class we introduce the monetary system and examine how money and the Fed affect the long-run behavior of the price level, inflation rate, and other nominal variables.

Throughout the course, I will relate our discussion to topics in United States history. This is my area of interest.

However, if you know a current event that relates to our studies, please draw my attention to it. Lastly, the most important goal we should set is to have fun.

We are trying to make some sense out of this crazy world; it is a difficult task, but a very interesting one. The lowest test score will be dropped. Because of this, there will be no makeup tests.

notebook guide gains from trade answer key

If you are sick, need to go on vacation, whatever, you may use that test as you dropped test. I, however, strongly suggest you plan on taking all tests and taking them seriously. Under special university approved circumstances, you may request to take the exam early. The final is given at the official university time. For me if no Aplia. Please consult your Schedule of Classes. Dragon 1st assignment syllabus. Clifford interviews Chairman Bernanke about why you should study economics?

Production Possibilities Curve- Econ 1. Exp student pp ??? Demand and Supply Explained- Econ 2. Macroeconomics - Chapter Unemployment and Inflation. Macro 2. Circular Flow Matrix- How the economy works- Econ 1.

Specialisation and the Gains from Trade

Hayek Rap Battle. Macro Unit 3- Practice Questions 1.First introduced by David Ricardo pictured incomparative advantage exists when a country has a 'margin of superiority' in the supply of a product i. Countries will usually specialise in and export products, which use intensively the factors inputs, which they are most abundantly endowed.

For example the Canadian economy which is rich in low cost land is able to exploit this by specializing in agricultural production. The dynamic Asian economies including China has focused their resources in exporting low-cost manufactured goods which take advantage of much lower labour costs.

This is now changing as China looks to move from a middle-income country by specializing in industries that use higher levels of knowledge and technology. In the richest advanced countries, the comparative advantage is mainly in specializing in producing and exporting high-value and high-technology goods and high-knowledge services. In this example, country B has an absolute advantage in both products.

Comparative Advantage and Gains from Trade

Absolute advantage occurs when a country or region can create more of a product with the same factor inputs. But Country A has a comparative advantage in the production of good X. Comparative advantage exists when a country has lower opportunity cost, i. In our example above, for country A, every extra unit of good Y produced involves an opportunity cost of 2 unit of good X. For country B, an additional unit of good Y involves a sacrifice of only 4. There are gains to be had from country A specializing in the supply of good X and country B allocating more of their resources into the production of good Y.

Were the UK to shift more resources into higher output of vacuum cleaners, the opportunity cost of each cleaner is one digital television. For the United States the same decision has an opportunity cost of 2. Therefore, the UK has a comparative advantage in vacuum cleaners.

If the UK chose to reallocate resources to digital cameras the opportunity cost of one extra camera is still one vacuum cleaner. Thus the United States has a comparative advantage in producing digital cameras. Exam Tip: Iit is useful to learn a numerical example to illustrate comparative advantage for use in an exam. For mutually beneficial trade to take place, the two nations have to agree an acceptable rate of exchange of one product for another.

There are gains from trade between the two countries. If the two countries trade at a rate of exchange of 2 digital cameras for one vacuum cleaner, the post-trade position will be as follows:.

Compared with the pre-specialisation output levels, consumers in both countries now have an increased supply of both goods to choose from.

Join s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning. You can also follow tutor2uEconomics on Twitter, subscribe to our YouTube channelor join our popular Facebook Groups. He has over twenty years experience as Head of Economics at leading schools.To login with Google, please enable popups. Sign up. To signup with Google, please enable popups.

Sign up with Google or Facebook. To sign up you must be 13 or older. Terms of Use and Privacy Policy. Already have an account? Log in. Get started today! Edit a Copy. Study these flashcards. Eric L. Fill in the blanks to complete the sentence about the production possibilities frontier.

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A community of woodworkers produces tables and chairs. If five new members join who specialize in chairs, the community will be able to produce both more tables and more chairs because the increase in labor resources has shifted the entire PPF upward and outward. False It is true that the community can produce both more tables and more chairs.

Fill in the blanks to complete the sentence about model failure in the Great Recession. Leading up to the Great Recession, a major problem with computer models used by many banks to predict the performance of mortgage-backed securities was that the models were designed to assume that real estate prices would always rise.

Which of the following types of graphs would be appropriate for data about a single variable? Correct Answer s 1. Place the steps that make up the scientific method in their proper order.

Observe an interesting phenomenon. Develop a hypothesis. In one week, Jedidiah Schlepp can produce 24 gizmos or 20 whatsits.

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What is the opportunity cost ratio, in gizmos per whatsit? Give the answer to one decimal place. They can spend their winnings immediately and live the good life for a while, or they can spend the money on training for the next tournament.

They ultimately decide to spend most of the winnings on training for the next tournament. What does their decision represent?As a member, you'll also get unlimited access to over 79, lessons in math, English, science, history, and more.

Plus, get practice tests, quizzes, and personalized coaching to help you succeed. You will be quizzed on topics such as gains from trade and the Production Possibility Frontier. This lesson will help you:. Over 65 million users have prepared for and other exams on Study. The videos on Study. Log in. Sign Up. Explore over 4, video courses.

Find a degree that fits your goals. Try it risk-free for 30 days. Instructions: Choose an answer and hit 'next'. You will receive your score and answers at the end. The Income received by a country The gain in consumer and producer surplus from trade. The price of goods traded times the quantity The cost to the other country of shipping goods to yours.

Cancel anytime. The gains from trade are maximized when a country specializes in producing what:. It can produce best. If a country were to produce only good Xit can produce 20 units. If it were to only produce good Yit can produce units. Create your account to access this entire worksheet. Create an account to get started Create Account. This lesson will help you: Calculate opportunity costs Review examples of comparative advantage and gains from trade Define comparative advantage Learn about the Production Possibility Frontier.

Practice Exams. Final Exam. Introduction to Macroeconomics: Help and Review. You are viewing lesson Lesson 10 in chapter 14 of the course:. The Production Possibilities Curve Comparative Advantage, Demand, Supply and Market Measuring the Economy: Help andTo model the effects of trade, we begin by looking at a hypothetical country that does not engage in trade and then see how its production and consumption change when it does engage in trade.

Suppose the hypothetical country of Roadway is completely isolated from the rest of the world. It neither exports nor imports goods and services.

A production possibilities curve illustrates the production choices available to an economy. Recall that the production possibilities curve for a particular country is determined by the factors of production and the technology available to it. Figure We assume that it produces only two goods—trucks and boats. Roadway must be operating somewhere on its production possibilities curve or it will be wasting resources or engaging in inefficient production. If it were operating inside the curve at a point such as D, then a combination on the curve, such as B, would provide more of both goods Roadway produces 3, more trucks and 3, more boats per year at B than at D.

notebook guide gains from trade answer key

The production possibilities curve for Roadway shows the combinations of trucks and boats that it can produce, given the factors of production and technology available to it. To maximize the value of total production, Roadway must be operating somewhere along this curve. Production at point D implies that Roadway is failing to use its resources fully and efficiently; production at point E is unobtainable. We have learned that the absolute value of the slope of a production possibilities curve at any point gives the quantity of the good on the vertical axis that must be given up to produce an additional unit of the good on the horizontal axis.

It thus gives the opportunity cost of producing another unit of the good on the horizontal axis. The slope of the production possibilities curve at any point is equal to the slope of a line tangent to the curve at that point. The absolute value of the slope equals the opportunity cost of increased boat production. Moving down and to the right along its production possibilities curve, the opportunity cost of boat production increases; this is an application of the law of increasing opportunity cost.

Recall that the slope of a curve at any point is equal to the slope of a line drawn tangent to the curve at that point. The opportunity cost of producing one more boat is thus one truck. As the law of increasing opportunity costs predicts, in order to produce more boats, Roadway must give up more and more trucks for each additional boat. People participate in international trade because they make themselves better off by doing so.

In this section we will find that countries that participate in international trade are able to consume more of all goods and services than they could consume while producing in isolation from the rest of the world. Suppose the world consists of two countries, Roadway and Seaside. Their production possibilities curves are given in Figure The production possibilities curve for a second hypothetical country, Seaside, is given in Panel b.

Gains from Trade: Definition & Example

Notice that the opportunity cost of an additional boat in Roadway is two trucks, while the opportunity cost of an additional boat in Seaside is 0. Clearly, Seaside has a comparative advantage in the production of boats. Each country produces two goods, boats and trucks. We will assume that the two countries have chosen to operate at these points through the workings of demand and supply.

That is, resources have been guided to their current uses as producers have responded to the demands of consumers in the two countries. In turn, consumers have responded to the prices charged by sellers of boats and trucks.

The two countries differ in their respective abilities to produce trucks and boats. As we can see by looking at the intersection of the production possibilities curves with the vertical axes in Figure If Roadway concentrated all of its resources on the production of trucks, it could produce 10, trucks per year. Seaside could produce only 5, Now look at the intersection of the production possibilities curves with the horizontal axes.

If Roadway concentrated all of its resources on the production of boats, it could produce 10, boats. Seaside could produce only 7, boats.