Part 1

  1. Adam Smith. The Wealth of Nations, published in 1776.

  2. The division of labor, the accumulation of capital, and the gains from trade.

  3. The complex production process is broken up into simple tasks. Each simple task is done by a different person.

  4. ABSOLUTE ADVANTAGE measures cost in physical units. The firm or nation that produces a given amount of a final product with the least amount of inputs has the ABSOLUTE ADVANTAGE.

  5. COMPARATIVE ADVANTAGE measures cost as opportunity cost. The firm or nation that produces a given amount of a final product at the lowest opportunity cost has the COMPARATIVE ADVANTAGE. Ironically, the one with the COMPARATIVE ADVANTAGE may not be the one with the ABSOLUTE ADVANTAGE.

  6. If the lawyer can make more than $80 an hour as a lawyer ($20 per hour times 4 hours), she should spend her time practicing law. She'll make more than enough in just one hour to pay for the typing she could have done in that hour.

  7. The USA, so good at everything, should put its factors to their most valued uses and leave less valued uses to Mexico. This would increase incomes in the US and, very likely, increase opportunities and incomes in Mexico as well. Mexico, because of its lower opportunity cost, may have a COMPARATIVE ADVANTAGE in many things, even if it does not have the ABSOLUTE ADVANTAGE in anything.

  8. The father of microeconomics is Alfred Marshall (1842-1924) and the father of macroeconomics is his student, John Maynard Keynes (1883-1946).

  9. The United Kingdom (Great Britain).


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