Comparative Advantage and Trade - Macro Topic 1.3 (Micro Topic 1.4)

What is a fundamental principle of trade in a free market?

• Trade only benefits one party at a time.

• Trade occurs when both parties believe they will benefit.

• Trade is primarily driven by government regulation.

• Trade is only beneficial when money is exchanged.

What does it mean for an individual, business, or country to have an absolute advantage in producing a good or service?

• They can produce the good at a lower opportunity cost.

• They can produce more of the good using the same quantity of resources.

• They are the only producer of that good.

• They have a higher demand for that good.

What concept describes a situation where an individual, business, or country can produce a good or service at a lower opportunity cost than another producer?

• Absolute advantage

• Specialization advantage

• Comparative advantage

• Production possibility frontier

Based on the per-unit opportunity costs presented, which country has a comparative advantage in producing planes? Jacobland: 1 plane costs 3 cars; Paulastan: 1 plane costs 1 car

• Jacobland, because they produce more cars.

• Paulastan, because they give up fewer cars to produce a plane.

• Neither, as Paulastan has an absolute advantage in both.

• Jacobland, because they have a higher opportunity cost for planes.

Jacobland can produce 15 cars or 5 planes. Paulastan can produce 16 cars or 16 planes. Which country should specialize in which product?

• Jacobland in planes, Paulastan in cars.

• Jacobland in cars, Paulastan in planes.

• Both in cars.

• Both in planes.

What is a primary benefit of free trade between two countries?

• Income distribution in each country will become more equitable.

• Employment in each country will increase.

• Migration from one country to the other will increase.

• Each country can consume beyond its constraints of resources and productivity.

Jacobland's opportunity cost for one plane is 3 cars. Paulastan's opportunity cost for one plane is 1 car. Which of the following terms of trade would be mutually beneficial?

• 1 plane for 0.5 cars

• 1 plane for 1 car

• 1 plane for 2 cars

• 1 plane for 3 cars

When determining comparative advantage, if the data provided is the amount of resources (e.g., labor hours) required to produce a unit of a good, what type of question is it, and what indicates an advantage?

• Output question; higher numbers indicate advantage.

• Output question; lower numbers indicate advantage.

• Input question; higher numbers indicate advantage.

• Input question; lower numbers indicate advantage.