Basic Economic Concepts
Uploaded by smikat9 on Mar 21, 2013
Basic Economic Concepts
WK1 – A2
ECO2072
South University
Katie L. Williams
March 6, 2013
Economic Concepts
Both absolute and comparative advantages produce various costs and benefits for international trade. The economic system is complex, however, in many cases various decisions need made how these decision-making processes are affected depends upon the invisible hand mechanism. However, the circular flow diagram helps the economy see what government sectors are involved in the economy, and what roles these participants’ plays in the economy as a whole, and how these sectors interact in various markets. The production possibilities model is complex, when using an example to show this production model, individuals are easily shown how this model illustrates various sections in the economy that may affect or influence the economy itself. In addition, individuals who understand the differences between both microeconomics and macroeconomics will have a better understanding of why these subdivisions of economics exist. Understanding these basic economic concepts will help individuals understand the basic fundamentals of international trade.
Absolute & Comparative Advantage
With absolute advantage the country has the ability to produce goods or services at a lower input than any other producers of that product, good, or service. For example, South Africa has the resources to produce rice, and Japan has the ability to produce electronics. However, if both countries try to produce both these products they will use up all their resources, and take away from the product or resources they could of used to produce a product, good, or service they have a higher resource for, it makes since for this country to trade their rice for electronics with another country, so they can go on to produce wheat at a lower input.
Comparative advantage allows the countries who trade internationally to produce a good, service, or product at a lower opportunity cost than another country. For instance, since South Africa has the ability to produce a high volume of rice they will pay a lower opportunity cost to produce this product than what it would cost for Japan to produce rice for their country.
Comparative advantage tends to look at a countries overall production of any good, service, or product with a specific time frame, unlike absolute advantage. Absolute advantage tends to focus on how the country can produce a high volume of this produce, service, or good in an efficient way, looking at various cost factors. However, comparative advantage tends to...