Chapter 2: Economic Models: Trade-offs and Trade – Page 1
Tunnel Vision (p. 23) What will chapter 2 be about?
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Models in Economics: Some Important Examples – Why are models used in economics? __________
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Why is the other things equal assumption necessary? _______________________________________________
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Models for Money – How did LTCM illustrate what can go wrong when economic models employ faulty
assumptions? How did flawed models cause the housing crisis?
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Trade-Offs: The PPF How many goods does an economy produce in the production possibilities frontier
(ppf) model? _________ The ppf is a line in the diagram that represents
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If an economy is producing inside this line on a graph, the outcome is feasible, but
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If an economy is producing outside this line on a graph, the outcome is
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All points on the line are _______________________ and __________________________ levels of
production.
Efficiency: How can an economy achieve efficiency in production without achieving efficiency in
allocation?
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Opportunity Cost: Note that if the ppf is a straight line, that line has a slope. That slope will help you
determine the relative _________________ ____________ of producing one more of one product vs. one
more of another.
In reality, the ppf is rarely a straight line, but is “bowed out” as in Figure 2-2. Why is this shape of the ppf
often more accurate?
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Economic Growth: How is economic growth portrayed on a ppf graph?
_______________________________ ___________________ Describe the factors that can cause such a
shift. ________________________________
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Complete Problem 2 a-e. on p. 42 in the space below.
Comparative Advantage and Gains from Trade – Explain in your own words how the concept of
comparative advantage can lead to gains from trade between Tom and Hank in the case described in the
book.
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Tom and Hank will be willing to engage in trade only if the result of the transaction puts them on what side
of their ppf? _____________ Explain this.
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Distinguish between comparative advantage and absolute advantage.
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(Your own thoughts) Because of the state of advancement of our economy, we generally have an absolute
advantage in all production over China. Why then do we engage in so much trade with China?
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Complete Problem 4 a-d. in the space below. Note the # of graphs will you draw as you plan.
CYU 2-1 1. a.
b.
c.
2. a.
b.
c.
Chapter 2: Economic Models: Trade-offs and Trade – Page 2
Comparative Advantage and International Trade – Why do politicians and economists often have different
views on international trade?
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In Figure 2-6, why is there gains for both the U.S. and Canada as they trade pork for aircraft?
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Transactions: The Circular Flow Diagram – What does the circular flow diagram represent?
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In a circular flow diagram, households provide firms with
___________________________________________ in the factor market, and become customers when they
__________ goods and services in the market.
After reading about the Circular Flow Diagram, explain in your own words what the diagram represents.
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CYU 2-1, 4.
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Problem 8. Circular Flow Diagram
a.
b.
c.
EIA: Rich Nation, Poor Nation – Why are many countries in the world so much poorer than the U.S.?
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________________________ If this is the case, why do we trade with them?
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Using Models, Positive versus Normative Economics – Describe in your own words the difference between
positive and normative economics.
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Of the questions 1., 2., & 3. Offered on page 37 of the book, identify whether each is positive or normative
and describe why.
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Problem 11. a.
b.
c.
d.
Problem 12. a.
b.
c.
d.
When and Why Economists Disagree – What tends to be the case with regards to media coverage of
economists’ opinions?
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Describe the two main sources of disagreement between economists.
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EIA: Why are there so many jobs for economists in the Washington, DC area?
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CYU 2-2, 1. a.
b.
2. a.
b.
c.
Problem 14.
15. a.
d.
b.
e.
c.
16.