Glossary
Absolute Advantage
The ability to produce a good or service using fewer resources or to produce more output with the same amount of resources than another producer.
Example:
If Japan can produce 100 cars with the same amount of labor and capital that Germany uses to produce 80 cars, Japan 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 a brilliant lawyer is also the fastest typist, they have a comparative advantage in legal work because the opportunity cost of them typing is much higher (lost legal fees) than hiring a secretary.
Input Other Under (IOU)
A mnemonic method used to calculate opportunity cost in 'input problems' by dividing the 'other' good's input requirement by the good in question's input requirement.
Example:
If it takes 2 hours to produce a shirt and 4 hours to produce a pair of pants, to find the opportunity cost of 1 shirt using Input Other Under, you'd calculate 2 hours (for shirt) / 4 hours (for pants) = 0.5 pairs of pants per shirt.
Input Problems
A type of comparative advantage problem where the data provided indicates the amount of resources (e.g., labor hours, raw materials) required to produce a fixed amount of a good or service.
Example:
A scenario stating that it takes 2 hours to produce a widget in Country X and 3 hours in Country Y is an input problem.
Opportunity Cost
The value of the next best alternative that must be foregone when a choice is made.
Example:
If a student decides to spend an hour studying economics instead of working at their part-time job, the money they could have earned is their opportunity cost.
Output Other Over (OOO)
A mnemonic method used to calculate opportunity cost in 'output problems' by dividing the 'other' good's quantity by the good in question's quantity.
Example:
If a country can produce 10 apples or 5 bananas, to find the opportunity cost of 1 apple using Output Other Over, you'd calculate 5 bananas / 10 apples = 0.5 bananas per apple.
Output Problems
A type of comparative advantage problem where the data provided indicates the total amount of goods or services that can be produced with a given set of resources.
Example:
A table showing that Country A can produce 100 shirts or 50 hats, while Country B can produce 80 shirts or 20 hats, is an example of an output problem.
Specialization
The act of focusing production on a limited number of goods or services in which an individual, firm, or country has an advantage.
Example:
A country that is very good at producing wine might choose to specialize in wine production and import other goods.
Trade
The voluntary exchange of goods, services, or resources between individuals, businesses, or countries.
Example:
When the U.S. buys coffee from Brazil and Brazil buys airplanes from the U.S., they are engaging in trade.