Mini-Review
- What does a production possibilities curve illustrate?
A. The inflation rate of a country
B. The opportunity costs and trade-offs of production
C. The aggregate supply in an economy
D. The aggregate demand in an economy
E. Both the aggregate supply and demand in an economy - Absolute advantage refers to:
A. A country having lower opportunity costs than another country
B. A country having lower production costs than another country
C. Two countries determining that they will not benefit from trade
D. Two countries determining that they will benefit from trade
E. A country having a higher production cost than another country - After specialization, what determines exchange rates for countries?
A. Domestic output and demand
B. International governments
C. Domestic governments
D. International forces of supply and demand
E. None of the above
Mini-Review Answers
- B.Production possibilities curves illustrate the opportunity costs and trade-offs of producing goods. Each
country has a production possibilities curve that illustrates its use of resources. If the country is underemploying
its resources, it is not being efficient with its resources. This inefficiency is noted with a point inside the
production possibilities curve. Since the curve itself represents efficiency, anything plotted inside the curve
represents underutilization of resources. - B.Absolute advantage refers to a country having lower production costs than another country when producing
a good. Absolute advantage does not take into account the opportunity costs of production; rather, it measures
monetary and resource costs of production. A country can have a low production cost for a good and still be
at a comparative disadvantage because another country has a lower opportunity cost when producing that good. - D. After countries have decided to specialize, the international forces of supply and demand determine the values
of the goods for trade. If the world output is lacking in a specific good, then the country producing that good has
price leverage with the trading of that good. Conversely, if the world’s supply of a specific good is high, the
country willing to trade that good loses price leverage with international trade.
Restrictions
The existence of restrictions comes about as a result of governments’ desire to protect domestic producers from foreign
competition. Although some cases of government intervention are needed, most of the time when the government inter-
venes it harms the consumer. Comparative advantage maximizes world output, providing variety and efficiency to the
world’s consumers. If government intervenes and restricts trade, consumers end up paying higher prices for a lower
quality of goods. First, let’s look at some arguments against free trade.
Part III: Microeconomics