Basics for Trade Definitions and Key Terms

Page 1

Week 1 and 2: Comparative Advantage

The Production Possibility Curve captures all maximum

output possibilities for two (or more) goods, given a set of inputs

(or resources) if inputs are used efficiently.

An Efficient Production Point represents a combination of

goods for which currently available resources do not allow an increase in the production of one

good without a reduction in the production of the other. All the points

on the PPC are efficient.

An Inefficient Production Point represents a combination of

goods which currently available resources allow an increase in the production of one good

without a reduction in the production of the other. All the points

below and to the left of the PPC are inefficient.

An Attainable Production Point represents any combination of

goods that can be produced with the

currently available resources. All the points on the

PPC or below and to the left of the PPC are attainable.

An Unattainable Production Point represents any combination

of goods that cannot be produced with the

currently available resources . All the points that lie

outside of the PPC are unattainable.

An agent has an Absolute Advantage in a

productive activity when

he/she can carry on this activity with less resources (i.e., less time)

than another agent.

The Opportunity Cost of a given action is the value of the

next best alternative to that particular action.

An agent has an Comparative Advantage in a

productive activity when

he/she has a lower opportunity cost of carrying this activity than

another agent.

The Consumption Possibility Curve represents all possible

combinations of two goods that the agents in an economy can consume.

The Consumption Possibility Curve represents all possible

combinations of two goods that the economy can feasibly consume when

it is open to international trade.