Sunday, September 6, 2009

Chapter 3 Practice Problems

1) Explain how absolute advantage and comparative advantage differ.

Absolute advantage reflects a comparison of productivity for one person, firm, or nation. Being more productive gives one an absolute advantage.

Comparative advantage is based on the relative opportunity costs of the person, firm, or nation. Having lower opportunity costs gives one a comparative advantage.

Note: it is possible for one person or country to have an absolute advantage in everything, but it is impossible to have a comparative advantage in all goods and services.

2) Will a nation tend to import or export goods for which it has a comparative advantage? Explain.

A nation will export goods for which it has a comparative advantage. It will do this because it has a smaller opportunity cost of producing those goods.

3) Why do economists oppose policies that restrict trade among nations?

Restrictions on trade prevent countries from receiving gains from trade. Restrictions on trade prevent citizens from achieving greater prosperity. Restrictions on trade are harmful to all countries.

4) Production Possibilities Frontier and Trade

a) Draw a PPF for two goods

b) Show a point indicating a possible efficient level of production and consumption without trade, label it ‘A.’

c) Show a point of possible consumption with trade, label it ‘B.’

d) What does the location of this point in reference to the PPF indicate?