2

2.1 the circular-flow model of trade

Review Activities

The Circular Flow Model

Directions: Complete the circular flow model by filling in the missing components.

The original version of this chapter contained H5P content. You may want to remove or replace this element.

Problems

No problems for section 2.1.

External Resources

Khan Academy: Circular-Flow Model

2.2 the production possibilities frontier

Review Activities

2.2 Vocabulary

The original version of this chapter contained H5P content. You may want to remove or replace this element.

Factors of Production

Directions: Match each good or service with the corresponding factor of production.

The original version of this chapter contained H5P content. You may want to remove or replace this element.

PPF Shifts

Directions: Match each shifted PPF with the proper change.

The original version of this chapter contained H5P content. You may want to remove or replace this element.

Problems

Problem 2.2.1: Complete the following PPF:

Answers: 10; 115; 40; 25

Problem 2.2.2: Champedder Inc. produces only wine and cheese. Below are combinations of the two goods that can be produced if all of the factors of production are fully utilized. Further, assume the company cannot add factors of production nor will there be any sort of technological improvement unless otherwise stated.

1. Draw the following PPF.
2. Calculate the cost of moving from production combination A to combination B. Then calculate the cost of moving production from combination B to combination C. Finally, calculate the cost of moving production from combination C to combination D.
3. Suppose that a new fermentation decreases the amount of time it takes to produce a gallon of wine. Draw a new PPF. (Note: You do not need to use any exact values for the new PPF.)

Answers: See video; 15/30/55; See video (biased growth with increase in wine)

Problem 2.2.3: An economy produces guns and roses. A new fertilizer allows roses to be grown more efficiently. Show the impact of this innovation on a PPF.
Answers: See video (biased growth allows for increase in maximum rose production.)

Problem 2.2.4: An economy produces guns and roses. Due to a new federal health program, citizens are eating much healthier and as a result are much more efficient. Show the impact of the federal health program on a PPF.
Answers: See video (complete outward shift of PPF).

External Resources

Khan Academy: Production Possibility Curve (or frontier)

Khan Academy: Opportunity Cost

Khan Academy: Increasing Opportunity Cost

2.3 trade and advantage

Review Activities

2.3 Vocabulary

The original version of this chapter contained H5P content. You may want to remove or replace this element.

Problems

Problem 2.3.1: England and Scotland both produce sweaters and scones. An English worker can produce 50 scones per hour or 1 sweater per hour. On the other hand, a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. A worker labors for 8 hours per day.

• 1. Create a production schedule that shows the most sweaters and scones each country’s workers could produce if they focused on that single good. This should look just like the table from the class examples.
  2. Draw the PPF for each.
  3. Who has absolute advantage in sweater production? Scone production?
  4. Who has comparative advantage in sweater production? Scone production?

Answers: See video; See video; Scone=England, Sweaters=Scotland; Scone=England, Sweaters=Scotland

https://youtu.be/MkCsCax1rF4

Problem 2.3.2:The two countries of Behrendonia and the Republic of Gannon produce widgets and gizmos. The opportunity cost of production is constant (meaning the PPF is linear.) Below is the maximum of each good each country could produce if they focused only on a single good.

1. Draw a properly labeled PPF for each country.
2. Who has absolute advantage in widget production? Gizmo production?
3. Who has comparative advantage in widget production? Gizmo production. Be sure to calculate opportunity costs.

Answers: See video; Widget=Behrend, Gizmo=Gannon; Widget=Behrend, Gizmo=Gannon

https://youtu.be/5osQz6TfDY4

Problem 2.3.3: The cities of Boston and Chicago can both produce Red Socks and White Socks. The production schedule below shows the maximum number of each type of sock each city can produce during the course of a day (if they only produce the one type of sock.)

1. Draw a properly labeled PPF for each country.
2. Who has absolute advantage in widget production? Gizmo production?
3. Who has comparative advantage in widget production? Gizmo production. Be sure to calculate opportunity costs.

Answers: See video; Red Socks = Chicago, White Socks = Chicago; Red Socks = Boston, White Socks = Chicago

https://youtu.be/yEC_1q8QgLs

External Resources

Khan Academy: Comparative advantage, specialization, and gains from trade

Khan Academy: Comparative Advantage and Absolute Advantage

Khan Academy: Opportunity cost and comparative advantage using an output table

Khan Academy: Worked Example

Crash Course Economics #2: Specialization and Trade