Suppose there are only two goods (bread and wine) and only two countries (England and Portugal). In England, the cost of producing 1 bottle of wine is 4 loaves of bread. What is the cost of producing 1 loaf of bread in England? Under what circumstances will England specialize in bread production and purchase its wine from Portugal? Explain.
What will be an ideal response?
If 1 bottle of wine costs 4 loaves of bread in England, then 1 loaf of bread must cost 1/4 bottle of wine. For England to specialize in bread production, England must be a more efficient bread producer than Portugal, which means that England's cost of producing bread must be less than Portugal's cost. Thus if producing 1 loaf of bread in Portugal costs more than 1/4 bottle of wine (or, equivalently, if producing 1 bottle of wine in Portugal costs less than 4 loaves of bread), then England will specialize in bread production and Portugal will specialize in wine production.
You might also like to view...
The price elasticity of demand is a measure of the
A. relationship between price and profitability. B. sensitivity of a good's price to changes in demand. C. responsiveness of buyers of a good to changes in its price. D. effect of changes in demand on the price.
If actual output is less than equilibrium output, firms will ________ output to keep from ________ inventories
A) increase; accumulating B) increase; depleting C) decrease; depleting D) decrease; accumulating
If an economy's population grows at 3 percent and real GDP grows at 2 percent, then:
a. per capita real GDP is declining. b. the economy's standard of living is increasing. c. per capita real GDP is negative. d. per capita real GDP is growing. e. the economy is experiencing unemployment.
Adam Smith's invisible hand principle stresses
a. that benevolence is a powerful motivator that encourages individuals to engage in productive economic activity. b. the tendency of the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society. c. the potential of government regulation as a means of bringing the self interest of individuals into harmony with the economic welfare of society. d. the tendency of self-interested individuals to pursue activities that benefit themselves but harm the overall economic welfare of society.