Question

A characteristic of a modem economy is (LO2) a) self-sufficiency b) specialization and exchange c) a high percentage of people who make their living as jacks-of-all-trades d) a high proportion of people employed in agriculture

Short answer

Option b) Specialization and exchange best describes a characteristic of a modern economy, as it reflects the important aspects of trade, exchange, and efficient production.

Step-by-step solution

Understand the characteristics of a modern economy

A modern economy is characterized by a complex system of production, distribution, and consumption of goods and services. This involves diversified and specialized production, as well as trade and exchange of goods and services among individuals, businesses, and countries. It is important to identify which of the given options reflects these characteristics.

Evaluate each option

a) Self-sufficiency: This means relying entirely on one's own resources or abilities to produce everything one needs. This does not depict a modern economy where specialization, trade, and exchange play a significant role. b) Specialization and exchange: In a modern economy, individuals, businesses, and countries often specialize in the production of certain goods or services where they have a comparative advantage. They then exchange these goods and services with others, creating a global network of trade. This option aligns with the characteristics of a modern economy. c) A high percentage of people who make their living as jacks-of-all-trades: This option suggests that people work in various roles and industries, which may not be efficient or productive. In a modern economy, specialization allows for increased efficiency and productivity. d) A high proportion of people employed in agriculture: While agriculture is important, a modern economy is characterized by a diverse range of industries, including services, manufacturing, and technology. This option is not a primary characteristic of a modern economy.

Choose the correct answer

Among the given options, option b) specialization and exchange best describes a characteristic of a modern economy, as it reflects the important aspects of trade, exchange and efficient production. Therefore, the correct answer is: b) Specialization and exchange

Key concepts

Specialization

In a modern economy, specialization plays a key role in enhancing productivity and efficiency. When individuals, companies, or even entire countries focus on producing a limited range of goods or services, they can do so with greater expertise and lower costs. This process allows

• more efficient allocation of resources
• better quality of goods produced
• reduced production time and costs

Specialization encourages experts to emerge in different fields, leading to innovations and higher productivity levels across the economy. For example, a software company focusing solely on developing operating systems can dedicate all resources to innovation in this field, leading to advanced products. Similarly, a country like Brazil might specialize in coffee production due to favorable climatic conditions, thus becoming a leader in the global market for coffee. This focused expertise is the hallmark of specialization in a modern economy.

Trade and Exchange

Trade and exchange are fundamentally intertwined with specialization. They allow for the distribution of goods and services that individuals or countries do not produce themselves. In a modern economy,

• businesses exchange goods to meet diverse consumer needs
• countries participate in international trade to benefit from resources and products from different parts of the world

Trade facilitates an interconnected global market, where technology and transport advances enable the swift movement of goods and services across borders. This exchange not only broadens consumer choice but also stimulates economic growth by expanding markets beyond local boundaries. When Japan exports cars to the US and imports agricultural products, both countries benefit from access to a wider range of goods than they could produce independently, illustrating the value of trade and exchange.

Comparative Advantage

The concept of comparative advantage is pivotal in understanding why and how trade and exchange occur within a modern economy. It refers to the ability of a party, whether an individual, business, or country, to produce a particular good or service at a lower opportunity cost than another.

• Countries leverage comparative advantage to specialize in goods they can produce most efficiently
• This leads to increased total output and mutual benefits from trade

For instance, if Country A is better at producing wine yet can also make cheese, while Country B excels in cheese production but can also produce wine, both can gain by specializing according to their comparative advantage. Country A should concentrate on wine, and Country B on cheese, then trade. This specialization based on comparative advantage enhances global efficiency, enabling economies to maximize productivity and consumption. Understanding comparative advantage thus explains why global trade doesn't necessarily harm domestic industries but can actually complement them and contribute to economic prosperity.