CH 2

Question 1

Adjustment Costs

Answer 1

Disruption to firms and workers caused by trade liberalization. While many benefit from trade, import surges may undermine the economic viability of firms, workers, and communities.

Question 2

Autarky

Answer 2

A case of national self-sufficiency or absence of trade.

Question 3

Basis for Trade

Answer 3

Why nations export and import certain products.

Question 4

Commodity Terms of Trade

Answer 4

Measures the relation between the prices a nation gets for its exports and the prices it pays for its imports.

Question 5

Complete Specialization

Answer 5

A situation in which a country produces only one good.

Question 6

Constant Opportunity Costs

Answer 6

A constant rate of sacrifice of one good for another as a nation slides along its production possibilities schedule.

Question 7

Consumption Gain

Answer 7

Post-trade consumption points outside a nation’s production possibilities schedule.

Question 8

Digital Trade

Answer 8

The use of digital technologies (e-commerce) that facilitate business transactions.

Question 9

Dynamic Gains from International Trade

Answer 9

The effect of trade on the country’s growth rate and thus on the volume of additional resources made available to, or utilized by, the trading country.

Question 10

Exit Barriers

Answer 10

Hurdles that make it difficult to move out of an industry.

Question 11

Factor Mobility

Answer 11

The ability of factors of production (land, labor, capital, and entrepreneurship) to move from one industry to another industry.

Question 12

Free Trade

Answer 12

A system of open markets between countries in which nations concentrate their production on goods they can make most cheaply, with all the consequent benefits of the division of labor.

Question 13

Gains from International Trade

Answer 13

Gains trading partners simultaneously enjoy due to specialization and the division of labor.

Question 14

Global Supply Chain

Answer 14

The international network created among different companies producing, handling, and/or distributing a specific product.

Question 15

The Importance of Being Unimportant

Answer 15

When one trading nation is significantly larger than the other, the larger nation attains fewer gains from trade while the smaller nation attains most of the gains from trade.

Question 16

Increasing Opportunity Costs

Answer 16

When each additional unit of one good produced requires the sacrifice of increasing amounts of the other good.

Question 17

Labor Theory of Value

Answer 17

The cost or price of a good depends exclusively upon the amount of labor required to produce it.

Question 18

Marginal Rate of Transformation (MRT)

Answer 18

The slope of the production possibilities schedule that shows the amount of one product a nation must sacrifice to get one additional unit of the other product.

Question 19

Mercantilists

Answer 19

An advocate or practitioner of mercantilism; a national economic system in which a nation could regulate its domestic and international affairs so as to promote its own interests through a strong foreign trade sector.

Question 20

No-trade Boundary

Answer 20

The division point where trade is beneficial and trade is not beneficial.

Question 21

Outer Limits for the Equilibrium Terms of Trade

Answer 21

Defined by the domestic cost ratios of trading nations.

Question 22

Outsourcing

Answer 22

When certain aspects of a product’s manufacture are performed in more than one country.

Question 23

Partial Specialization

Answer 23

When a country specializes only partially in the production of the good in which it has a comparative advantage.

Question 24

Price-specie-flow Doctrine

Answer 24

David Hume’s theory that a favorable trade balance was possible only in the short term, and that over time, it would automatically be eliminated via changes in product prices.

Question 25

Principle of Absolute Advantage

Answer 25

In a two-nation, two-product world, international specialization and trade will be beneficial when one nation has an absolute cost advantage in one good and the other nation has an absolute cost advantage in the other good.

Question 26

Principal of Comparative Advantage

Answer 26

Ability to produce a good or service at a lower opportunity cost than others can produce it.

Question 27

Production Gains

Answer 27

Increases in production resulting from specialization in the product of comparative advantage.

Question 28

Production Possibilities Frontier

Answer 28

A schedule that shows various alternative combinations of two goods that a nation can produce when all of its factor inputs are used in their most efficient manner.

Question 29

Region of Mutually Beneficial Trade

Answer 29

The area that is bounded by the cost ratios of the two trading countries.

Question 30

Terms of Trade (ToT)

Answer 30

The relative prices at which two products are traded in the marketplace.

Question 31

Theory of Reciprocal Demand

Answer 31

Relative demand conditions determine what the actual terms of trade will be within the outer limits of the terms of trade.

Question 32

Trade Triangle

Answer 32

An area in a production possibilities diagram showing a country’s exports, imports, and equilibrium terms of trade.

Question 33

Trading Possibilities Line

Answer 33

A line in a production possibilities diagram representing the equilibrium terms-of-trade ratio.