AB 204 Unit 2 Economic Models and Trade

AB 204 Unit 2: Economic Models and Trade

Basic Economic Models and Comparative Advantage

Basic Economic Models and Comparative Advantage

The Discussion topics include the difference between microeconomics and macroeconomics, the two basic economic models of the Circular-Flow Diagram and the Production Possibility Frontier, and comparative advantage, which is the main force behind interdependence in the market economy and the gains from trade.

Respond to two of the following Discussion topics. Read Chapters 2 and 3, and remember to include references and links to the websites that are important contributors to your posts.

Topic 1: The theory of comparative advantage states that there are gains from trade if countries specialize and optimize their opportunity costs.

Why is comparative advantage a driving force behind trade behind trade between regions and countries?

Why does specialization lead to welfare improvement? Why engaging in trade is better than trying to be self-sufficient?

Topic 2: Economists use economic models to study real world economic issues. The two basic economic models are Production Possibility Frontier (PPF) and the Circular Flow Diagram.

How does the production possibility frontier model help us understand the feasible and efficient amounts that can be produced? What does the outward shift in production possibility curve indicate?

What are the major markets and economic decision makers (economic agents) the circular flow diagram indicate? What is the importance of the diagram in various markets of the economy or economic interactions (transactions)?

UNIT 2 Discussion

Economic Models and Trade – Topic One

Hello everyone,

Why is comparative advantage a driving force behind trade behind trade between regions and countries?

Comparative advantage lets us see which production group is using less inputs or resources to produce their goods. According to Mankiw, 2015, trade is based off of comparative advantage instead of absolute advantage. This is preferable when it comes to trade because whoever uses less will gain more from the trade because they were not put out as much as another party would have been in producing the same good. When trade focuses on comparative advantage the overall production in the economy can go up (Mankiw, 2015).

Why does specialization lead to welfare improvement? Why engaging in trade is better than trying to be self-sufficient?

The way that one party can use fewer inputs or resources is by specializing in that trade. If someone specializes in producing a certain good they are likely to complete it in less time and will less cost to them. This is why it is better to allow everyone to specialize in what they are good at so that overall less resources are used, improving welfare. Trade is the preferable method of gaining other goods because if two people specialize in something they can trade that good. If someone can farm well and another person can build things well, it only makes sense that the farmer would trade with the builder food for housing. It wouldn’t make sense for a farmer to try building his house when someone else can do it better, likewise for the builder. This is a simplified example of trade but the concept holds true.

Katana

References

Mankiw, N. G. (2015). Principles of Macroeconomics, 7th Edition. [Kaplan].

Retrieved from https://kaplan.vitalsource.com/#/books/9781305156067/