Ch 2 - Ricardian Flashcards
5 main reasons why countries trade goods with one another
(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
Offshoring
producing various parts of a good in different countries then assembling them into the finished product in a final location
Patterns of trade
the impact of a country’s technology on which products it imports and exports
Definition of technology in terms of production
how much output you can get given a certain amount of inputs (e.g. labor)
Ricardian model
explanation of trade in terms of how a country’s level of technology affects the wages paid to labor
Free-trade area
where countries have no restrictions on trade between them
When does a country have absolute advantage?
when it has the best technology for producing a good i.e. its productivity in that good is higher than another country
When does a country have comparative advantage?
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
Marginal product of labor (MPL)
the extra output obtained by using one more unit of labor
Indifference curve
shows the combination of two goods that a person or economy can consume and be equally satisfied and have constant utility
Why are indifference curves used?
to reflect the utility that an individual consumer receives from various consumption points
Perfect competition
has many workers and small firms that take prices and wages as given (no market power)
Production possibility frontier (PPF)
represents the maximum amount of a good a country can produce for a given output of the other good
Opportunity cost
the cost of producing a good in terms of its best alternative use
Why should wages be equalized across two industries?
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
When are two countries in an international trade equilibrium?
when the relative price of a good is the same in both countries
World price line
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
2 main insights from the Ricardian model
(1) Each country exports the good in which it has a comparative advantage; (2) Each country gains from trade
Increasing returns to scale
increase in output is greater relative to increase in input
Diminishing marginal returns
when an optimal level of capacity is reached, adding increasing a factor of production, ceteris paribus, will yield smaller increases in output
What do firms pay workers in competitive labor markets?
the value of their marginal product of labor in a particular good
Real wage
expressed in terms of the goods you can consume rather than money; similar to purchasing power
How does engaging in international trade help poorer countries?
it increases their real wages and improves their standard of living
How can we measure productivity in the data?
value-added per worker
Value-added
the difference between the value of output and the value of intermediate goods and materials used in production
Export supply curve
shows the amount of a good home wants to export at various relative prices
Import demand curve
shows the amount of a good foreign wants to import at various relative prices
International trade equilibrium as shown in a graph
the equilibrium relative price of a good at which the quantity of home exports equals the foreign imports
Home’s export supply of a good
the excess of the total home supply over the quantity demanded by home consumers
Foreign import demand of a good
the excess of total foreign demand over the quantity supplied by foreign suppliers
Terms of trade
the price of a country’s exports divided by or relative to the price of its imports
How would an increase in terms of trade affect a country?
a country will be better off because it will earn more for its exports and pay less for its imports
