APM_U1.P2 - 1.3 Comparative Adv. & 1.4 Demand

What is the main principle behind the concept of comparative advantage?

• Specializing in the production of goods with the lowest opportunity cost

• Producing more goods with the same amount of resources

• Maximizing the use of available resources

• Minimizing production costs

How is comparative advantage different from absolute advantage?

• Comparative advantage focuses on opportunity cost, while absolute advantage focuses on resource efficiency

• Comparative advantage is about producing more goods, while absolute advantage is about producing goods at a lower cost

• Comparative advantage is about trading, while absolute advantage is about self-sufficiency

• Comparative advantage is about global trade, while absolute advantage is about local trade

What formula do economists use to identify comparative advantage?

• Give up / Gain

• Gain / Give up

• Cost / Benefit

• Benefit / Cost

What happens when the terms of trade fall between the opportunity costs of two trading partners?

• Both partners benefit from the trade

• Only one partner benefits from the trade

• Neither partner benefits from the trade

• Trade becomes impossible

What is the opportunity cost for Canada to produce steel?

• 1/2 a unit of coal

• 2 units of steel

• 1/4 a unit of coal

• 4 units of steel

What does comparative advantage refer to?

• • Producing goods at the highest absolute output

• • Producing goods with the lowest opportunity cost

• • Producing goods with the most resources available

• • Producing goods with the highest monetary value

Answer explanation

Rationale: Comparative advantage focuses on producing goods with the lowest opportunity cost, which determines trade benefits.

Which of the following best describes terms of trade?

• • The cost of importing goods into a country

• • The exchange rate between two currencies

• • The rate at which goods are exchanged between nations

• • The value of total exports in a country

Answer explanation

Rationale: Terms of trade refer to the exchange rate for goods between trading partners, ensuring mutual benefit.

If Country A can produce 10 cars or 5 planes, and Country B can produce 8 cars or 4 planes, what is the opportunity cost for Country A to produce one plane?

• • 2 cars

• • 0.5 cars

• • 5 cars

• • 10 cars

Answer explanation

Rationale: Country A sacrifices 2 cars (10/5) to produce 1 plane, illustrating the opportunity cost.

How do nations determine which goods to specialize in?

Answer explanation

Sample Response: Nations use comparative advantage to identify goods with the lowest opportunity cost of production. By specializing in these goods and trading for others, they maximize efficiency and consumption.

What is the role of opportunity cost in determining terms of trade?

Answer explanation

Sample Response: Opportunity cost helps establish the range for mutually beneficial trade. Terms of trade must fall between the opportunity costs of the two trading partners to ensure both benefit.