MACROECONOMICS – ECO 2013

Chapter 2 Outline

 

Chapter 2 – Comparative Advantage: The Basis for Exchange

 

I.                    Production Possibilities Curve

A.     What is a PPC?

1.      production schedule for “Tom”

2.      related PPF drawing

B.     What does it show?

1.      possible production (feasible)

a.       technologically efficient points

b.      allocatively efficient point

2.      impossible production (infeasible)

3.      increasing opportunity cost (total vs. marginal)

a.       specialization of resources (gives curved shape)

b.      impact of marginal decisions

4.      factors that shift the economy’s PPC

a.       general economic growth, negative economic growth

b.      specialized growth

II.                 Exchange and Opportunity Cost (Comparative Advantage)

A.     Simplification of PPF

1.      straight line = absolute trade-off, rather than marginal decisions

2.      two people (or nations) can each produce the good where their opportunity cost is lowest, then trade, and both will be better off

B.     Difference between Absolute Advantage and Comparative Advantage

C.     Calculating Comparative Advantage

1.      determining opportunity cost for each

2.      calculating the cost of one good in terms of the other

3.      determining who has comparative advantage

4.      trade allows people to consume more than they could each produce

D.     Trade Benefits Nations as well

1.      Which nations have comparative advantage in light manufacturing?

2.      In what industries does the U.S. have comparative advantage?

3.      Does trade make all individuals in each nation better off?