Question 1

What is absolute advantage?

Accepted Answer

A situation where an individual, business, or country can produce more of a good or service than any other producer with the same quantity of resources

(also see comparative advantage)

Question 2

What is comparative advantage?

Accepted Answer

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

(also see absolute advantage)

Question 3

What is production specialization according to comparative advantage?

Accepted Answer

When producers specialize in the production of goods and services they have a comparative advantage for, they can increase their overall output and create exchange opportunities that lead to consumption opportunities beyond the PPC

(it is most efficient for everyone to do what they are best at)

Question 4

What determines the terms of trade for exchange?

Accepted Answer

Comparative advantage and opportunity costs

(take the opportunity cost for one item in between both countries' opportunity costs)

Question 5

What are terms of trade?

Accepted Answer

How much goods are exchanged for each other so that mutually beneficial trade can occur

Question 6

Which country has a comparative advantage in steel production?

Accepted Answer

Japan

Canada: 1000/500 = 2

Japan: 1200/300 = 4

4 > 2

Question 7

Which country has a comparative advantage in truck production?

Accepted Answer

Brazil

US: 6/3 = 2

Brazil: 2/2 = 1

1 < 2

(this is an input question, so the lower number is better)

Question 8

Using the same amount of time and resources, Tomer can either write 100 lines of code or process 20 reports, and Charlotte can either write 120 lines of code or process 20 reports

What would acceptable terms of trade be?

Accepted Answer

1 line of code for 0.167-0.20 of a report

Tomer: 20/100 = 0.2 reports per line of code

Charlotte: 20/120 = 0.167 reports per line of code

Acceptable ToT are within the two opportunity costs

1.3 Comparative Advantage and Trade, AP Macroeconomics Flashcards