What is the law of comparative advantage, and why is it important in international trade?
The law of comparative advantage states that aggregate output is maximized when countries specialize in the production of goods for which they are the lowest opportunity cost producer and then trade for other goods. It explains how countries can improve their situation through trade, rather than producing all goods themselves.
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The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. If a packet of bubble gum sells for $1.00, then
A) Joanne is creating a $2.00 per hour profit for the firm. B) Joanne is creating a $2.00 per hour loss for the firm. C) the Bubby Gum company should pay Joanne more. D) the Bubby Gum company should decrease the price of the bubble gum so it sells more and makes a larger profit. E) None of the above answers is correct because more information about Joanne's real wage is needed to decide what to do.
The business cycle is defined as
A) changes in the stock market. B) changes in financial markets. C) persistent growth in potential GDP. D) irregular ups and downs in production and jobs. E) the period of time during which the unemployment rate is rising.