Ch 2 - Ricardian

Question 1

5 main reasons why countries trade goods with one another

Answer 1

(1) differences in technology used; (2) differences in total amount of resources; (3) differences in the costs of offshoring; (4) proximity; (5) increasing returns to scale due to specializing

Question 2

Offshoring

Answer 2

producing various parts of a good in different countries then assembling them into the finished product in a final location

Question 3

Patterns of trade

Answer 3

the impact of a country’s technology on which products it imports and exports

Question 4

Definition of technology in terms of production

Answer 4

how much output you can get given a certain amount of inputs (e.g. labor)

Question 5

Ricardian model

Answer 5

explanation of trade in terms of how a country’s level of technology affects the wages paid to labor

Question 6

Free-trade area

Answer 6

where countries have no restrictions on trade between them

Question 7

When does a country have absolute advantage?

Answer 7

when it has the best technology for producing a good i.e. its productivity in that good is higher than another country

Question 8

When does a country have comparative advantage?

Answer 8

when it produces a certain good better than the other goods it produces i.e. it has a lower OC of producing that good than another country

Question 9

Marginal product of labor (MPL)

Answer 9

the extra output obtained by using one more unit of labor

Question 10

Indifference curve

Answer 10

shows the combination of two goods that a person or economy can consume and be equally satisfied and have constant utility

Question 11

Why are indifference curves used?

Answer 11

to reflect the utility that an individual consumer receives from various consumption points

Question 12

Perfect competition

Answer 12

has many workers and small firms that take prices and wages as given (no market power)

Question 13

Production possibility frontier (PPF)

Answer 13

represents the maximum amount of a good a country can produce for a given output of the other good

Question 14

Opportunity cost

Answer 14

the cost of producing a good in terms of its best alternative use

Question 15

Why should wages be equalized across two industries?

Answer 15

if not, all workers will have the incentive to transfer to the industry with higher wages, leading to a wage decrease in the high-wage industry and a wage increase in the low-wage industry

Question 16

When are two countries in an international trade equilibrium?

Answer 16

when the relative price of a good is the same in both countries

Question 17

World price line

Answer 17

shows the range of consumption possibilities that a country can achieve by specializing in one good and engaging in international trade; the new budget constraint under trade

Question 18

2 main insights from the Ricardian model

Answer 18

(1) Each country exports the good in which it has a comparative advantage; (2) Each country gains from trade

Question 19

Increasing returns to scale

Answer 19

increase in output is greater relative to increase in input

Question 20

Diminishing marginal returns

Answer 20

when an optimal level of capacity is reached, adding increasing a factor of production, ceteris paribus, will yield smaller increases in output

Question 21

What do firms pay workers in competitive labor markets?

Answer 21

the value of their marginal product of labor in a particular good

Question 22

Real wage

Answer 22

expressed in terms of the goods you can consume rather than money; similar to purchasing power

Question 23

How does engaging in international trade help poorer countries?

Answer 23

it increases their real wages and improves their standard of living

Question 24

How can we measure productivity in the data?

Answer 24

value-added per worker

Question 25

Value-added

Answer 25

the difference between the value of output and the value of intermediate goods and materials used in production

Question 26

Export supply curve

Answer 26

shows the amount of a good home wants to export at various relative prices

Question 27

Import demand curve

Answer 27

shows the amount of a good foreign wants to import at various relative prices

Question 28

International trade equilibrium as shown in a graph

Answer 28

the equilibrium relative price of a good at which the quantity of home exports equals the foreign imports

Question 29

Home’s export supply of a good

Answer 29

the excess of the total home supply over the quantity demanded by home consumers

Question 30

Foreign import demand of a good

Answer 30

the excess of total foreign demand over the quantity supplied by foreign suppliers

Question 31

Terms of trade

Answer 31

the price of a country’s exports divided by or relative to the price of its imports

Question 32

How would an increase in terms of trade affect a country?

Answer 32

a country will be better off because it will earn more for its exports and pay less for its imports