32.2 The Determination of Trade Patterns Flashcards
What is the law of one price?
The law of one price states that when a product is traded throughout the entire world, the prices in various countries (net of any specific taxes or tariffs) will differ by no more than the cost of transporting the product between countries. Aside from differences caused by these transport costs, there is a single world price.
When do exports occur?
Exports occur whenever there is excess supply domestically at the world price.
What kinds of goods are best for a country to export?
Countries export the goods for which they are low-cost producers. That is, they export goods for which they have a comparative advantage.
When do imports of a particular product occur?
Imports occur whenever there is excess demand domestically at the world price.
What kind of products are good for a country to import?
Countries import the goods for which they are high-cost producers. That is, they import goods for which they have a comparative disadvantage.
Is the theory of comparative advantage obsolete?
The theory that comparative advantage is a major influence on trade flows is not obsolete, but the theory that comparative advantage is completely determined by forces beyond the reach of decisions made by private firms and by public policy has been discredited.
The case in support of a specific government intervention in international trade is…
(1) there is scope for governments to improve on the results achieved by the free market,
(2) the costs of the intervention be less than the value of the improvement to be achieved, and
(3) governments will actually be able to carry out the required interventionist policies (without, for example, being sidetracked by considerations of electoral advantage).
What are terms of trade?
terms of trade
The ratio of the average price of a country’s exports to the average price of its imports.
What situation describes a fall in the terms of trade?
A rise in the price of imported goods, with the price of exports unchanged, indicates a fall in the terms of trade; it will now take more exports to buy the same quantity of imports.
What is a rise in the terms of trade?
a rise in the price of exported goods, with the price of imports unchanged, indicates a rise in the terms of trade; it will now take fewer exports to buy the same quantity of imports.
Why is a rise in a country’s terms of trade good?
A rise in a country’s terms of trade is beneficial because it expands the country’s consumption possibilities.
What is the formula for Terms of trade?
Terms of trade = Index of export prices/Index of import prices×100
