Glossary
Absolute Advantage
The ability to produce more of a good or service than another producer using the same amount of resources, or to produce the same amount using fewer resources.
Example:
If Country A can produce 100 cars with 10 workers, and Country B can only produce 80 cars with 10 workers, Country A has an absolute advantage in car production.
Comparative Advantage
The ability to produce a good or service at a lower opportunity cost than another producer.
Example:
Even if the U.S. can produce both corn and cars more efficiently than Mexico, if Mexico's opportunity cost of producing corn is lower, Mexico has a comparative advantage in corn.
Export
Goods or services produced domestically and sold to buyers in another country.
Example:
When the United States sells its agricultural products, like soybeans, to other nations, those products are considered U.S. exports.
Import
Goods or services purchased from sellers in another country and brought into the domestic economy.
Example:
If a consumer in Canada buys a car manufactured in Germany, that car is an import for Canada.
Input Problems
A type of comparative advantage problem where the data provided represents the amount of resources (e.g., labor hours) required to produce one unit of a good.
Example:
If a problem states that it takes 5 hours to produce a bicycle and 3 hours to produce a scooter, it's an input problem.
Opportunity Cost
The value of the next best alternative that must be given up when a choice is made.
Example:
If a student decides to spend an hour studying economics, the opportunity cost might be the hour they could have spent working a part-time job.
Output Problems
A type of comparative advantage problem where the data provided represents the total amount of goods that can be produced with a given set of resources.
Example:
When analyzing how many computers or smartphones a country can produce in a month, you are dealing with an output problem.
Specialization
The act of focusing production on a limited number of goods or services in which a country or individual has a comparative advantage.
Example:
Japan might specialize in electronics production because it has a comparative advantage in that sector, leading to higher overall global output.
Terms of Trade
The rate at which one good can be exchanged for another between trading partners, or the ratio of a country's export prices to its import prices.
Example:
If a country can trade 1 ton of coffee for 2 tons of wheat, these are the terms of trade between coffee and wheat.