ScienceEconomicsChapter 2- The Production Possibility Model
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Chapter 2- The Production Possibility Model

Atticus Parker avatar Atticus Parker
25 July 2022
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question
State the law of one price. How is it related to the movement of manufacturing out of the US?
answer
The law of one price states that the wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country. Wages adjusted for productivity differences are lower in other countries, so firms choose to use workers in foreign countries.
question
Does the fact that the production possibility model tells us that trade is good mean that in the real world free trade is necessarily the best policy? Explain.
answer
No, because the model does not take into account the importance of institutions and government in trade and takes no other societal goals into account besides maximum total output.
question
If workers in China and India become as productive as US workers, what adjustments will allow the US to regain its competitiveness?
answer
It is possible that there will be development in areas in production/services that will allow US wages to remain high, but in all likelihood either US nominal wages will grow slowly and foreign nominal wages will grow rapidly and catch up or US exchange rates will decline to equalize wages. Some combination of the two is most likely.
question
What effect has globalization had on the ability of firms to specialize? How has this affected the competitive process?
answer
Globalization increases competition by allowing greater specialization and division of labor
question
If neither of two countries has a comparative advantage in either of two goods, what are the gains from trade?
answer
There are no gains from trade
question
How does the theory of comparative advantage relate to production possibility curves?
answer
The theory of comparative advantage underlies the shape of the production possibility curve. As more and more of a good is produced, resources that have less of a comparative advantage are brought into the production of a good, causing the production possibility curve to be bowed outward.