Basics for Trade Definitions and Key Terms

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.