Author Question: When a person has an absolute advantage in producing a good, the person necessarily has a lower ... (Read 99 times)

segrsyd · **on:** Jun 29, 2018

When a person has an absolute advantage in producing a good, the person necessarily has a lower opportunity cost of producing it. Is this assertion true or false?

What will be an ideal response?

Question 2

Explain the basic idea of the expenditure multiplier and the role consumers play in determining its magnitude.

What will be an ideal response?

Christopher · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The assertion is incorrect. An absolute advantage is when a person can produce more of the good than someone else. A comparative advantage relies on a comparison of opportunity costs, so a person has a comparative advantage in producing a good if the person can produce the good at a lower opportunity cost.

Answer to Question 2

The basic idea of the expenditure multiplier is that any increase in expenditure will increase real GDP by a larger (a multiple) amount. The magnitude of the expenditure multiplier basically depends on how strongly consumers respond to additional income. Any initial increase in expenditure increases aggregate expenditure, which leads to more production and an increase in real GDP and income. Thus an increase, say in investment, will generate an increase in income and this increase, in turn, will induce an increase in consumption expenditure. The second round, the increase in consumption expenditure, is the result of the first round, the increase in investment. But the story does not stop with just two rounds. The initial increase in expenditure sets off a chain of increases because the second round increase in consumption leads to yet another increase in GDP and income. As a result of this next increase in income, consumption expenditure increases another time and a third round of expenditure increases occurs. The final result of all the rounds has real GDP increasing many fold compared to the initial increase in investment.