Assignment: Basic Economic Models and Comparative Advantage

The Discussion topics include the difference between microeconomics and macroeconomics, the two basic economic models of the Circular-Flow Diagram and the Production Possibility Frontier, and comparative advantage, which is the main force behind interdependence in the market economy and the gains from trade.

Respond to two of the following Discussion topics.

Topic 1: The theory of comparative advantage states that there are gains from trade if countries specialize and optimize their opportunity costs.

a. Why is comparative advantage a driving force behind trade behind trade between regions and countries?

b. Why does specialization lead to welfare improvement? Why engaging in trade is better than trying to be self-sufficient?

Topic 2: Economists use economic models to study real world economic issues. The two basic economic models are Production Possibility Frontier (PPF) and the Circular Flow Diagram.

a. How does the production possibility frontier model help us understand the feasible and efficient amounts that can be produced? What does the outward shift in production possibility curve indicate?

b. What are the major markets and economic decision makers (economic agents) the circular flow diagram indicate? What is the importance of the diagram in various markets of the economy or economic interactions (transactions)?