Ch. 69 World Trade

Question 1

Define absolute advantage?

Answer 1

When a country is a able to produce a good more cheaply in absolute terms than another country.

Question 2

Define comparative advantage?

Answer 2

When a country is able to produce a good more cheaply relative to other goods produced domestically than another country.

Question 3

Define theory of comparative advantage?

Answer 3

Countries will find it mutually advantageous to trade if the opportunity cost of production of goods differs.

Question 4

Assumptions of theory of comparative advantage?(6)

Answer 4

• no transport costs
• costs are constant and no EofS
• only 2 economies producing 2 goods
• traded goods are homogenous (raw are, manufactured aren’t)
• no tariffs or trade barriers
• perfect knowledge

Question 5

Define terms of trade?

Answer 5

The ratio of export prices to import prices

Question 6

Index terms of trade = ?

Answer 6

Index of export prices/index of import prices x100

Question 7

Reasons for world trade? (4)

Answer 7

• Natural endowments (eg. Lots of oil naturally/good farming climate)
• Price (some goods cheaper to produce in some countries than others)
• Product Differentiation - same products can have slight differences from diff countries.
• Political reasons (eg. Reduction of trade barriers)