AP Macro Examples: Opportunity Cost, Trade & Specialization

📚 Quick Study Guide

• ⏱️ Opportunity Cost: The value of the next best alternative forgone when making a decision.
• 🤝 Trade: The exchange of goods or services between individuals, firms, or countries.
• 🎯 Specialization: Focusing on producing a limited range of goods or services to increase efficiency.
• 🌍 Absolute Advantage: The ability to produce more of a good or service than another producer using the same amount of resources.
• ⚖️ Comparative Advantage: The ability to produce a good or service at a lower opportunity cost than another producer.
• 📈 Terms of Trade: The ratio at which a country can trade its exports for imports. Improves when a country can obtain more imports for a given quantity of exports.

Practice Quiz

1. Which of the following best describes opportunity cost?

   1. The monetary cost of a decision.
   2. The value of the next best alternative forgone.
   3. The sum of all costs associated with a decision.
   4. The cost of resources used in production.

2. Specialization and trade MOST LIKELY lead to which of the following?

   1. A decrease in overall production.
   2. An increase in consumption possibilities.
   3. A shift towards self-sufficiency.
   4. A reduction in economic efficiency.

3. If Country A can produce both wheat and cars more efficiently than Country B, then Country A has:

   1. A comparative advantage in both goods.
   2. An absolute advantage in both goods.
   3. A comparative advantage in wheat only.
   4. An absolute advantage in cars only.

4. Comparative advantage is based on:

   1. The amount of resources a country possesses.
   2. The level of technology in a country.
   3. Opportunity costs.
   4. The size of a country's population.

5. Assume that the United States and Mexico can both produce avocados and computers. If the United States has a comparative advantage in producing computers, then:

   1. Mexico has a comparative advantage in producing computers.
   2. The United States has a lower opportunity cost of producing computers than Mexico.
   3. Mexico has an absolute advantage in producing avocados.
   4. The United States must also have an absolute advantage in producing computers.

6. Which of the following is NOT a benefit of trade?

   1. Increased competition.
   2. Lower prices for consumers.
   3. Greater variety of goods and services.
   4. Reduced specialization.

7. The terms of trade will improve for a country if:

   1. Its export prices fall relative to its import prices.
   2. Its import prices fall relative to its export prices.
   3. Both its export and import prices rise.
   4. Both its export and import prices fall.