Basic Economic Concepts

Week 1 Assignment 2

Basic Economic Concepts

Principles of Macro-Economics

Shacara Wyatt

South University Online

Absolute and Comparative Advantage

An absolute advantage is the ability to produce a good or service while using minimum resources than any other producers (Hall & Liberman, 2014). The benefits of the international trade from absolute advantage is the fact that each country has an advantage in various goods and services. This advantage also has benefits for international trade, individuals have the opportunity to improve their economic welfare by making themselves specialized in the production of good or service that the nation has an absolute advantage and then exporting the goods and services to the other countries (Hall &Liberman). Which results in them having the availability to import goods or services from those countries that had an absolute advantage in producing those goods (Hall & Liberman, 2014).

“Invisible Hand”

Invisible hand is a phrase used by Adam Smith to explain how people in the market, in order to pursue their self-interest, are led by an “invisible hand” to promote the well-being of the entire community (Baumol & Blinder, 2014). Invisible hand has an important role in making decisions, as in a competitive market in which consumers have a choice to pick their product.

Circular Flow Model components

* Household: Households get income from factor market by selling their land, labor, and capital entrepreneurship. They pay a portion of their income to the government in the form of federal and state tax and use the rest of the money in the form of consumption expenditure to buy goods or services from the product market.

* Factor Market: The factor market buys land, labor, and capital entrepreneurship from households by paying them an amount in form of wage, salary etc. The market uses land, labor, and capital entrepreneurship to produce factor of production.

* Business: Business buy factor of...