1.3 Determing the Pattern of International Trade Flashcards
How does a country’s no-trade relative price affect its exports and imports?
A country’s no-trade relative price determines which product it will export and which it will import.
What does the no-trade relative price equal?
The no-trade relative price equals the country’s opportunity cost of production.
What determines the pattern of exports and imports in a country?
The pattern of exports and imports is determined by the opportunity costs of production in each country, reflecting their comparative advantage.
What do both countries export in international trade?
Both countries export the good for which they have a comparative advantage.
When are two countries in an international trade equilibrium?
The two countries are in an international trade equilibrium when the relative price of wheat is the same in both countries.
What two issues are important to fully understand the international trade equilibrium?
Determining the relative price of wheat (or cloth) in the trade equilibrium.
Understanding how the shift from the no-trade equilibrium to the trade equilibrium affects production and consumption in both Home and Foreign.
What happens to production and consumption in each country after the change in relative prices due to international trade?
After the change in relative prices from their pre-trade level to the international trade equilibrium, countries will adjust their production and consumption based on their comparative advantage and the new trade opportunities.
What does the world price line represent in international trade?
The world price line shows the range of consumption possibilities that a country can achieve by specializing in one good and engaging in international trade.
How to claulcate the gradient of a line?
Rise/Run
Where does Home consumption occur in the international trade equilibrium?
Home consumption occurs at point C, where the world price line is tangent to the indifference curve
𝑈
2
, as this is the highest possible utility curve on the world price line.
What does the world price line represent in terms of consumption possibilities?
The world price line shows the range of consumption possibilities that a country can achieve by specializing in one good (wheat, in Home’s case) and engaging in international trade (exporting wheat and importing cloth).
How can the world price line be interpreted in the context of international trade?
The world price line can be thought of as a new budget constraint for the country under international trade.
How does the world price line compare to Home’s original PPF?
The world price line (line BC) lies above Home’s original PPF, reflecting the increased consumption possibilities due to international trade.
What advantage does international trade create for Home’s consumption?
International trade allows Home to achieve consumption possibilities that were not available in the absence of trade, where the consumption point had to be on Home’s PPF.
How does Home’s utility change with international trade compared to no trade?
Home obtains a higher utility with international trade (represented by
𝑈
2
) than in the absence of international trade (represented by
𝑈
1
).
What does the increase in Home’s utility with trade demonstrate?
The increase in Home’s utility with trade demonstrates the gains from trade, which is the ability of a country to achieve higher utility for its citizens under free trade than with no trade.
What is the first lesson of the Ricardian model?
The first lesson of the Ricardian model is that the pattern of trade is determined by comparative advantage.
What is the second lesson of the Ricardian model?
The second lesson of the Ricardian model is that there are gains from trade for both countries.
What do firms pay workers in competitive labor markets?
In competitive labor markets, firms will pay workers the value of their marginal product.
How do wages change as a country develops its technology?
As a country develops its technology, its wages will correspondingly rise.
What determines wages in a country?
Wages are determined by absolute advantage.
What determines the pattern of trade between countries?
The pattern of trade is determined by comparative advantage.
How are wages and trade patterns related in a country with poor technology?
A country with poor technology can only export at a price others are willing to pay by having low wages.
