©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 1 MACROECONOMICS: EXPLORE & APPLY by Ayers and Collinge CHAPTER 2 “Production and Trade”

1 ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e

MACROECONOMICS: MACROECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

MACROECONOMICS: MACROECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

CHAPTER 2CHAPTER 2“Production and Trade”“Production and Trade”

CHAPTER 2CHAPTER 2“Production and Trade”“Production and Trade”


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

1.1. Analyze tradeoffs facing both Analyze tradeoffs facing both individuals and countriesindividuals and countries

2.2. Relate the types of resources an Relate the types of resources an economy possesses.economy possesses.

3.3. Model a country’s production Model a country’s production possibilities, and how these possibilities possibilities, and how these possibilities respond to technological development.respond to technological development.

1.1. Analyze tradeoffs facing both Analyze tradeoffs facing both individuals and countriesindividuals and countries

2.2. Relate the types of resources an Relate the types of resources an economy possesses.economy possesses.

3.3. Model a country’s production Model a country’s production possibilities, and how these possibilities possibilities, and how these possibilities respond to technological development.respond to technological development.


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

4.4. Describe how economies can grow faster if Describe how economies can grow faster if they are willing to cut back on current they are willing to cut back on current consumption.consumption.

5.5. Visualize the flow of goods and services, Visualize the flow of goods and services, resources, and money in the economy.resources, and money in the economy.

6.6. Explain how people and countries gain from Explain how people and countries gain from trade by specializing according to comparative trade by specializing according to comparative advantage. advantage.

7.7. (E&A) Convey how economic strength can (E&A) Convey how economic strength can lead to victory, sometimes without a fight.lead to victory, sometimes without a fight.

4.4. Describe how economies can grow faster if Describe how economies can grow faster if they are willing to cut back on current they are willing to cut back on current consumption.consumption.

5.5. Visualize the flow of goods and services, Visualize the flow of goods and services, resources, and money in the economy.resources, and money in the economy.

6.6. Explain how people and countries gain from Explain how people and countries gain from trade by specializing according to comparative trade by specializing according to comparative advantage. advantage.

7.7. (E&A) Convey how economic strength can (E&A) Convey how economic strength can lead to victory, sometimes without a fight.lead to victory, sometimes without a fight.


2.12.1SCARCITY AND CHOICESCARCITY AND CHOICE2.12.1SCARCITY AND CHOICESCARCITY AND CHOICE

EconomicsEconomics exist because resources are exist because resources are scarce relative to our wants.scarce relative to our wants.

ScarcityScarcity means that we have to make means that we have to make choiceschoices..

EconomicsEconomics exist because resources are exist because resources are scarce relative to our wants.scarce relative to our wants.

ScarcityScarcity means that we have to make means that we have to make choiceschoices..


Opportunity CostsOpportunity CostsOpportunity CostsOpportunity Costs

Opportunity costsOpportunity costs..

represent the value of forgone represent the value of forgone alternativesalternatives

All choices involve opportunity All choices involve opportunity costs!costs!

Opportunity costsOpportunity costs..

represent the value of forgone represent the value of forgone alternativesalternatives

All choices involve opportunity All choices involve opportunity costs!costs!

There is no such thing as a free lunch!!!There is no such thing as a free lunch!!!


ResourcesResourcesResourcesResources

The four categories of resources are:The four categories of resources are:• LandLand• LaborLabor• EntrepreneurshipEntrepreneurship• CapitalCapital

– Human capitalHuman capital– Physical capitalPhysical capital

The four categories of resources are:The four categories of resources are:• LandLand• LaborLabor• EntrepreneurshipEntrepreneurship• CapitalCapital

– Human capitalHuman capital– Physical capitalPhysical capital


2.2 PRODUCTION POSSIBILITIES

2.2 PRODUCTION POSSIBILITIES

A production possibility frontier is a A production possibility frontier is a model that illustrates both model that illustrates both scarcityscarcity and and choicechoice by assuming that only two by assuming that only two goods may be produced.goods may be produced.

A production possibility frontier is a A production possibility frontier is a model that illustrates both model that illustrates both scarcityscarcity and and choicechoice by assuming that only two by assuming that only two goods may be produced.goods may be produced.


The Economy of Castaway IslandThe Economy of Castaway IslandThe Economy of Castaway IslandThe Economy of Castaway Island

Data Point Fish Caught per Day Coconuts Collected per DayA 5 0B 4 10C 3 16D 2 19E 1 21F 0 22


A Graph of a Production A Graph of a Production Possibility FrontierPossibility Frontier

A Graph of a Production A Graph of a Production Possibility FrontierPossibility Frontier

AA

BB

CC

DDEEFF

11 22 33 44 55 FishFish

1010

1616

1919212222

CoconutsCoconuts


The Economy of Castaway IslandThe Economy of Castaway Island- The Bowed Outward PPF -- The Bowed Outward PPF -

The Economy of Castaway IslandThe Economy of Castaway Island- The Bowed Outward PPF -- The Bowed Outward PPF -

Data Point Fish Caught per Day Opportunity CostF 0 0E 1 1D 2 3C 3 6B 4 12A 5 22


Marginal Opportunity CostMarginal Opportunity CostMarginal Opportunity CostMarginal Opportunity Cost

AA

BB

CC

DDEEFF

11 22 33 44 55 FishFish

1010

1616

1919212222

CoconutsCoconutsTheThe marginal opportunity costmarginal opportunity cost is theis theadditional opportunity cost of one additional opportunity cost of one more fish. more fish.

TheThe marginal opportunity costmarginal opportunity cost is theis theadditional opportunity cost of one additional opportunity cost of one more fish. more fish.


Marginal Opportunity CostMarginal Opportunity CostMarginal Opportunity CostMarginal Opportunity Cost

AA

BB

CC

DDEEFF

11 22 33 44 55 FishFish

1010

1616

1919212222

TheThe bowed or concave bowed or concave slope slope (shape)of the PPF curve (shape)of the PPF curve reflects the Principle of reflects the Principle of “the “the law of increasing cost”.law of increasing cost”.

TheThe bowed or concave bowed or concave slope slope (shape)of the PPF curve (shape)of the PPF curve reflects the Principle of reflects the Principle of “the “the law of increasing cost”.law of increasing cost”.

CoconutsCoconuts


Law of Increasing CostLaw of Increasing CostLaw of Increasing CostLaw of Increasing Cost

DataData

PointPoint

Fish caughtFish caught

per dayper day

Opportunity Opportunity CostCost

# of coconuts # of coconuts forgoneforgone

Marginal Marginal Opportunity Opportunity

Cost (change in Cost (change in # of coconuts # of coconuts

forgone)forgone)

FF 00 00 undefined*undefined*

EE 11 11 11

DD 22 33 22

CC 33 66 33

BB 44 1212 66

AA 55 2222 1010


Technologically Efficient and Technologically Efficient and Feasible PointsFeasible Points


Good XGood X

Goo

d Y

Goo

d Y

Not Not FeasibleFeasible

Not Not FeasibleFeasible

Feasible but Feasible but InefficientInefficient

Feasible but Feasible but InefficientInefficient

All points on the PPFAll points on the PPFare are technologicallyare are technologicallyefficient and feasible.efficient and feasible.

All points on the PPFAll points on the PPFare are technologicallyare are technologicallyefficient and feasible.efficient and feasible.




Good XGood X

Goo

d Y

Goo

d Y

Allocative efficiencyAllocative efficiencyimplies a specific pointimplies a specific pointon the PPF that is the on the PPF that is the most valuable combination most valuable combination of outputs.of outputs.

Allocative efficiencyAllocative efficiencyimplies a specific pointimplies a specific pointon the PPF that is the on the PPF that is the most valuable combination most valuable combination of outputs.of outputs.

In general, thereIn general, therewill be only onewill be only one

point on the PPFpoint on the PPFthat is allocativelythat is allocatively

efficient. efficient.


Whenever the production possibility Whenever the production possibility frontier frontier shifts outwardshifts outward, the economy is , the economy is

said to have experienced said to have experienced

economic growtheconomic growth..

Whenever the production possibility Whenever the production possibility frontier frontier shifts outwardshifts outward, the economy is , the economy is

said to have experienced said to have experienced

economic growtheconomic growth..

Economic GrowthEconomic GrowthEconomic GrowthEconomic Growth


Economic GrowthEconomic GrowthEconomic GrowthEconomic Growth

Good X

Goo

d Y

Economic growth can Economic growth can be caused by an be caused by an

increase in resources.increase in resources.

Economic growth can Economic growth can be caused by an be caused by an

increase in resources.increase in resources.


Characteristics of the production Characteristics of the production possibilities frontier (PPF):possibilities frontier (PPF):Characteristics of the production Characteristics of the production possibilities frontier (PPF):possibilities frontier (PPF):• The ppf shows how much of one good can be produced The ppf shows how much of one good can be produced

for any amount of another.for any amount of another.• When on the frontier, the opportunity cost of one good When on the frontier, the opportunity cost of one good

is less of the other good.is less of the other good.• The frontier is bowed outward.The frontier is bowed outward.• Every point on the frontier is technologically efficient.Every point on the frontier is technologically efficient.• Points inside the frontier imply unemployed resources.Points inside the frontier imply unemployed resources.• Points outside the frontier are unattainable.Points outside the frontier are unattainable.• Shifting the frontier outward implies economic growth.Shifting the frontier outward implies economic growth.

• The ppf shows how much of one good can be produced The ppf shows how much of one good can be produced for any amount of another.for any amount of another.

• When on the frontier, the opportunity cost of one good When on the frontier, the opportunity cost of one good is less of the other good.is less of the other good.

• The frontier is bowed outward.The frontier is bowed outward.• Every point on the frontier is technologically efficient.Every point on the frontier is technologically efficient.• Points inside the frontier imply unemployed resources.Points inside the frontier imply unemployed resources.• Points outside the frontier are unattainable.Points outside the frontier are unattainable.• Shifting the frontier outward implies economic growth.Shifting the frontier outward implies economic growth.


Technological GrowthTechnological GrowthTechnological GrowthTechnological Growth

PretzelsPretzels

Pu

mp

kin

sP

um

pk

ins

Starting PPFStarting PPF

New PPFNew PPF

General GrowthGeneral Growth

PretzelsPretzels

Pu

mp

kin

sP

um

pk

ins

Starting PPFStarting PPF

New PPFNew PPF

Specialized GrowthSpecialized Growth


Specialized GrowthSpecialized GrowthSpecialized GrowthSpecialized Growth

• Specialized growthSpecialized growth pivots the production pivots the production possibility frontier in the direction of more possibility frontier in the direction of more output in the industry affected by the output in the industry affected by the technological change.technological change.


CapitalCapital

Con

sum

er G

ood

sC

onsu

mer

Goo

ds

BB

AA

Sacrificing current consumption for capital formation hastens economic growth

Sacrificing current consumption for capital formation hastens economic growth

ppf as Capital ppf as Capital Depreciates and Depreciates and is Not Replaced.is Not Replaced.

ppf as Capital ppf as Capital Grows.Grows.

Specialized GrowthSpecialized GrowthSpecialized GrowthSpecialized Growth


2.3 2.3 THE CIRCULAR FLOW MODEL THE CIRCULAR FLOW MODEL OF ECONOMIC ACTIVITYOF ECONOMIC ACTIVITY

2.3 2.3 THE CIRCULAR FLOW MODEL THE CIRCULAR FLOW MODEL OF ECONOMIC ACTIVITYOF ECONOMIC ACTIVITY

The The circular flow modelcircular flow model depicts how markets depicts how markets use the medium of use the medium of moneymoney to determine to determine whatwhat goods and services are produced andgoods and services are produced and whowho gets to buy them. The model depicts both the gets to buy them. The model depicts both the output marketoutput market and the and the input marketinput market..

The The circular flow modelcircular flow model depicts how markets depicts how markets use the medium of use the medium of moneymoney to determine to determine whatwhat goods and services are produced andgoods and services are produced and whowho gets to buy them. The model depicts both the gets to buy them. The model depicts both the output marketoutput market and the and the input marketinput market..


The Circular Flow Model The Circular Flow Model of Economic Activityof Economic Activity

The Circular Flow Model The Circular Flow Model of Economic Activityof Economic Activity

HouseholdsHouseholds BusinessesBusinesses

$ Purchases$ Purchases

Goods & ServicesGoods & Services

$ Incomes$ Incomes

Land, Labor, Capital, EntrepreneurshipLand, Labor, Capital, Entrepreneurship


2.42.4EXPANDING CONSUMPTION EXPANDING CONSUMPTION POSSIBILITIES THROUGH TRADEPOSSIBILITIES THROUGH TRADE

2.42.4EXPANDING CONSUMPTION EXPANDING CONSUMPTION POSSIBILITIES THROUGH TRADEPOSSIBILITIES THROUGH TRADE

• For their own self interest economies engage For their own self interest economies engage in trade with other economies.in trade with other economies.

• This is true for national economies, This is true for national economies, regional economies, local economies, and regional economies, local economies, and even individuals (personal economies).even individuals (personal economies).

• For their own self interest economies engage For their own self interest economies engage in trade with other economies.in trade with other economies.

• This is true for national economies, This is true for national economies, regional economies, local economies, and regional economies, local economies, and even individuals (personal economies).even individuals (personal economies).


Expanding ConsumptionExpanding ConsumptionExpanding ConsumptionExpanding Consumption

• People specialize in their jobs according People specialize in their jobs according to their interest and opportunities. to their interest and opportunities.

• Then they use the income they earn to Then they use the income they earn to purchase goods and services.purchase goods and services.

• Countries engaged in international trade Countries engaged in international trade operate the same way, first they decide operate the same way, first they decide what to produce, then what to consume.what to produce, then what to consume.

• People specialize in their jobs according People specialize in their jobs according to their interest and opportunities. to their interest and opportunities.

• Then they use the income they earn to Then they use the income they earn to purchase goods and services.purchase goods and services.

• Countries engaged in international trade Countries engaged in international trade operate the same way, first they decide operate the same way, first they decide what to produce, then what to consume.what to produce, then what to consume.


Comparative Advantage vs. Comparative Advantage vs. Absolute AdvantageAbsolute Advantage

Comparative Advantage vs. Comparative Advantage vs. Absolute AdvantageAbsolute Advantage

An economy has a An economy has a comparative advantagecomparative advantage in in producing a good if it can produce a good at producing a good if it can produce a good at a lower opportunity cost than could other a lower opportunity cost than could other countries.countries.

An economy has an An economy has an absolute advantageabsolute advantage if it if it is able to produce something with fewer is able to produce something with fewer resources than others could.resources than others could.

An economy has a An economy has a comparative advantagecomparative advantage in in producing a good if it can produce a good at producing a good if it can produce a good at a lower opportunity cost than could other a lower opportunity cost than could other countries.countries.

An economy has an An economy has an absolute advantageabsolute advantage if it if it is able to produce something with fewer is able to produce something with fewer resources than others could.resources than others could.


International TradeInternational TradeInternational TradeInternational Trade

International tradeInternational trade is more important to is more important to small countries than to large countries.small countries than to large countries. Exports:Exports: Goods and services a country Goods and services a country sells to other countriessells to other countries Imports:Imports: Goods and services a country Goods and services a country buys from other countries.buys from other countries.


International TradeInternational TradeInternational TradeInternational Trade

Through trade, a country can consume a Through trade, a country can consume a combination of goods combination of goods

and services that lies outside its and services that lies outside its

PPF, meaning that thePPF, meaning that the country’s country’s consumption possibilities consumption possibilities will will

exceed itsexceed its production possibilities.production possibilities.

Through trade, a country can consume a Through trade, a country can consume a combination of goods combination of goods

and services that lies outside its and services that lies outside its

PPF, meaning that thePPF, meaning that the country’s country’s consumption possibilities consumption possibilities will will

exceed itsexceed its production possibilities.production possibilities.


Exports as a Percentage of GDPExports as a Percentage of GDPExports as a Percentage of GDPExports as a Percentage of GDP

0

1020

30

40

5060

70

80

Ireland

Sou

thK

orea

UK

Japan


Specialization According to Specialization According to Comparative AdvantageComparative Advantage

Specialization According to Specialization According to Comparative AdvantageComparative Advantage

Country Computer Memory Chips Barrels of OilJapan 10 units per day 4 per day

England 5 units per day 3 per day

Productivity per worker in Productivity per worker in

Japan and EnglandJapan and England

Productivity per worker in Productivity per worker in

Japan and EnglandJapan and England


Computing Opportunity Cost and Computing Opportunity Cost and Comparative AdvantageComparative Advantage

Computing Opportunity Cost and Computing Opportunity Cost and Comparative AdvantageComparative Advantage

Product LocationProduct Location Opportunity CostOpportunity Cost(C is computer chips and B (C is computer chips and B is Barrels of oil)is Barrels of oil)

Opportunity CostOpportunity Cost

(per unit)(per unit)

Computer chips Computer chips in Japanin Japan

10C=4B10C=4B2/5 barrel of oil 2/5 barrel of oil

(.4B)*(.4B)*

Computer chips Computer chips in Englandin England

5C=3B5C=3B3/5 barrel of oil3/5 barrel of oil

(.6B)(.6B)

Oil in JapanOil in Japan 4B=10C4B=10C5/2 computer 5/2 computer chips (2.5C)chips (2.5C)

Oil in EnglandOil in England 3B=5C3B=5C5/3 computer 5/3 computer chips (1.67C)*chips (1.67C)*


2.5 EXPLORE & APPLY2.5 EXPLORE & APPLYVictory Victory Guns and Butter – Guns and Butter – From a From a Strong EconomyStrong Economy

2.5 EXPLORE & APPLY2.5 EXPLORE & APPLYVictory Victory Guns and Butter – Guns and Butter – From a From a Strong EconomyStrong Economy

In World War 2, the In World War 2, the US was able to quickly US was able to quickly convert many civilian convert many civilian industries to military industries to military production and play a production and play a pivotal role in pivotal role in defeating the both the defeating the both the Nazi’s and Japan.Nazi’s and Japan.

In World War 2, the In World War 2, the US was able to quickly US was able to quickly convert many civilian convert many civilian industries to military industries to military production and play a production and play a pivotal role in pivotal role in defeating the both the defeating the both the Nazi’s and Japan.Nazi’s and Japan.

Nearly 5 decades later Nearly 5 decades later it was able to defeat the it was able to defeat the Soviet Union Soviet Union “economically”, “economically”, without any shots being without any shots being fired. That’s the best fired. That’s the best kind of victory.kind of victory.

Nearly 5 decades later Nearly 5 decades later it was able to defeat the it was able to defeat the Soviet Union Soviet Union “economically”, “economically”, without any shots being without any shots being fired. That’s the best fired. That’s the best kind of victory.kind of victory.


Terms along the WayTerms along the WayTerms along the WayTerms along the Way

opportunity costsopportunity costslandlandlaborlaborhuman capitalhuman capitalcapitalcapitalentrepreneurshipentrepreneurshiptechnologytechnologyproduction possibilities production possibilities frontierfrontierlaw of increasing costlaw of increasing cost

opportunity costsopportunity costslandlandlaborlaborhuman capitalhuman capitalcapitalcapitalentrepreneurshipentrepreneurshiptechnologytechnologyproduction possibilities production possibilities frontierfrontierlaw of increasing costlaw of increasing cost

economic growtheconomic growthmoneymoneybarterbartercircular flowcircular flowoutput marketoutput marketinput marketinput marketcomparative advantagecomparative advantageabsolute advantageabsolute advantageExportsExportsimportsimports

economic growtheconomic growthmoneymoneybarterbartercircular flowcircular flowoutput marketoutput marketinput marketinput marketcomparative advantagecomparative advantageabsolute advantageabsolute advantageExportsExportsimportsimports


Test YourselfTest YourselfTest YourselfTest Yourself

1.1. The opportunity cost of a new city police contract The opportunity cost of a new city police contract is:is:

a.a. the amount of money it takes in order to provide the city the amount of money it takes in order to provide the city with the most highly qualified personnel.with the most highly qualified personnel.

b.b. the value of the other goods and services that the city and the value of the other goods and services that the city and taxpayers will be forced to give up in order to pay for the taxpayers will be forced to give up in order to pay for the contract.contract.

c.c. the cost to victims of crimes that the new contract would the cost to victims of crimes that the new contract would prevent.prevent.

d.d. the value of the opportunities that city policemen acquire the value of the opportunities that city policemen acquire by accepting it. by accepting it.

1.1. The opportunity cost of a new city police contract The opportunity cost of a new city police contract is:is:

a.a. the amount of money it takes in order to provide the city the amount of money it takes in order to provide the city with the most highly qualified personnel.with the most highly qualified personnel.

b.b. the value of the other goods and services that the city and the value of the other goods and services that the city and taxpayers will be forced to give up in order to pay for the taxpayers will be forced to give up in order to pay for the contract.contract.

c.c. the cost to victims of crimes that the new contract would the cost to victims of crimes that the new contract would prevent.prevent.

d.d. the value of the opportunities that city policemen acquire the value of the opportunities that city policemen acquire by accepting it. by accepting it.



2.2. Which of the following items is the best Which of the following items is the best example of an economic resource?example of an economic resource?

a.a. A stock certificate.A stock certificate.

b.b. A one-hundred dollar bill.A one-hundred dollar bill.

c.c. A tractor.A tractor.

d.d. A plate of spaghetti.A plate of spaghetti.

2.2. Which of the following items is the best Which of the following items is the best example of an economic resource?example of an economic resource?

a.a. A stock certificate.A stock certificate.

b.b. A one-hundred dollar bill.A one-hundred dollar bill.

c.c. A tractor.A tractor.

d.d. A plate of spaghetti.A plate of spaghetti.



3. 3. A production possibilities frontier shows A production possibilities frontier shows combinations of:combinations of:

a.a. inputs that can produce a specific quantity of inputs that can produce a specific quantity of output.output.

b.b. outputs that people consume.outputs that people consume.c.c. outputs that can be achieved as technology outputs that can be achieved as technology

improves.improves.d.d. outputs that can be achieved in a given time outputs that can be achieved in a given time

period with all available resources employed using period with all available resources employed using current technology.current technology.

3. 3. A production possibilities frontier shows A production possibilities frontier shows combinations of:combinations of:

a.a. inputs that can produce a specific quantity of inputs that can produce a specific quantity of output.output.

b.b. outputs that people consume.outputs that people consume.c.c. outputs that can be achieved as technology outputs that can be achieved as technology

improves.improves.d.d. outputs that can be achieved in a given time outputs that can be achieved in a given time

period with all available resources employed using period with all available resources employed using current technology.current technology.



4. 4. If a Nation’s production possibilities indicates that If a Nation’s production possibilities indicates that 1,000,000 battle tanks and 6,000,000 houses could 1,000,000 battle tanks and 6,000,000 houses could be produced, or alternatively, 750,000 tanks and be produced, or alternatively, 750,000 tanks and 8,000,000 houses could also be produced, the 8,000,000 houses could also be produced, the opportunity cost of each additional house would opportunity cost of each additional house would be:be:

a.a. 250,000 tanks.250,000 tanks.b.b. 8 tanks.8 tanks.c.c. 0.125 tanks.0.125 tanks.d.d. 2,000,000 tanks.2,000,000 tanks.

4. 4. If a Nation’s production possibilities indicates that If a Nation’s production possibilities indicates that 1,000,000 battle tanks and 6,000,000 houses could 1,000,000 battle tanks and 6,000,000 houses could be produced, or alternatively, 750,000 tanks and be produced, or alternatively, 750,000 tanks and 8,000,000 houses could also be produced, the 8,000,000 houses could also be produced, the opportunity cost of each additional house would opportunity cost of each additional house would be:be:

a.a. 250,000 tanks.250,000 tanks.b.b. 8 tanks.8 tanks.c.c. 0.125 tanks.0.125 tanks.d.d. 2,000,000 tanks.2,000,000 tanks.



5. 5. As a nation develops economically, its As a nation develops economically, its production possibilities frontier:production possibilities frontier:

a.a. remains stable.remains stable.

b.b. shifts towards the origin.shifts towards the origin.

c.c. shifts away from the origin.shifts away from the origin.

d.d. becomes steeper, but does not shift.becomes steeper, but does not shift.

5. 5. As a nation develops economically, its As a nation develops economically, its production possibilities frontier:production possibilities frontier:

a.a. remains stable.remains stable.

b.b. shifts towards the origin.shifts towards the origin.

c.c. shifts away from the origin.shifts away from the origin.

d.d. becomes steeper, but does not shift.becomes steeper, but does not shift.



6. 6. When a country can produce a good with When a country can produce a good with fewer resources than any other country, the fewer resources than any other country, the country has:country has:

a.a. a comparative advantage.a comparative advantage.

b.b. a resource advantage.a resource advantage.

c.c. an absolute advantage.an absolute advantage.

d.d. an unfair advantage.an unfair advantage.

6. 6. When a country can produce a good with When a country can produce a good with fewer resources than any other country, the fewer resources than any other country, the country has:country has:

a.a. a comparative advantage.a comparative advantage.

b.b. a resource advantage.a resource advantage.

c.c. an absolute advantage.an absolute advantage.

d.d. an unfair advantage.an unfair advantage.


The End!The End!Next Chapter 3Next Chapter 3““Demand and Demand and

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©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 1 MACROECONOMICS: EXPLORE & APPLY by Ayers and Collinge CHAPTER 2 “Production and Trade”