AP Macro comparative advantage review

What is comparative advantage?

The ability of a country to produce a good at a lower opportunity cost than another country.

Difference between absolute advantage and comparative advantage

Absolute advantage refers to the ability to produce more of a good with the same resources, while comparative advantage focuses on lower opportunity costs.

True or false: Comparative advantage is based on opportunity cost.

True, because it measures the trade-off of producing one good over another.

Fill in the blank: Countries should specialize in goods where they have a _____ advantage.

comparative

What happens when countries specialize according to comparative advantage?

Total production increases, leading to potential gains from trade.

Question: Why is trade beneficial?

It allows countries to consume beyond their own production possibilities.

What is opportunity cost?

The value of the next best alternative that is forgone when making a decision.

True or false: A country can have comparative advantage in all goods.

False, because comparative advantage is relative and depends on opportunity costs.

Example of comparative advantage in agriculture.

If Country A can produce wheat cheaper than corn, it should specialize in wheat.

What is the production possibilities frontier (PPF)?

A curve that illustrates the maximum feasible amount of two goods that a country can produce.

Difference between trade balance and trade deficit

Trade balance is when exports equal imports; trade deficit occurs when imports exceed exports.

Which is NOT a reason countries trade?

To create inefficiencies in resource allocation.

Fill in the blank: Gains from trade are maximized when each country focuses on its _____ advantage.

comparative

What is a tariff?

A tax imposed on imported goods to protect domestic industries.

True or false: Specialization can lead to increased economic interdependence.

True, because countries become reliant on each other for goods.