Ch.3 | economic liberalism and market exchange in global arena

Question 1

absolute advantage

Answer 1

A nation’s ability to produce a particular commodity more efficiently than other nations

Question 2

balance of payments

Answer 2

An accounting of all the goods, services, and capital exported and imported across national borders, reflecting a nation’s economic interactions with those in other nations

Question 3

capital

Answer 3

A factor of production that people construct, or invent, and then use to transform the other factors of production—land and labor—to make them more productive

Question 4

capital account

Answer 4

A part of the balance-of-payments account that comprises capital inflows and outflows related primarily to investment at home and abroad

Question 5

comparative advantage

Answer 5

A nation’s ability to produce a particular commodity with a greater margin of efficiency over its trading partners than it enjoys in the production of other commodities; the foundation of modern international trade and the basis for the principle of specialization

Question 6

competitive markets

Answer 6

Decentralized mechanisms that coordinate the allocation, distribution, and use of the raw materials, labor, and capital that go into economic activity; symmetric and voluntary exchange among nonhierarchical parties

Question 7

consumption possibilities

Answer 7

The consumption frontier for a nation; the maximum amount of economic goods that can be utilized in a society

Question 8

credit

Answer 8

q

Question 9

current account

Answer 9

A part of the balance-of-payments account that comprises the imports and exports of goods, services, and several ancillary items

Question 10

demand

Answer 10

The market force that represents the aggregation of individual consumption preferences

Question 11

efficiency

Answer 11

A comparative gauge of the inputs of land, labor, and capital that go into the production of individual goods or services; an efficient market optimizes the use of the resources that go into economic activity to satisfy the aggregated wants and preferences of the members of society

Question 12

exchange-rate mechanism (ERM)

Answer 12

The mechanism that determines the value of one currency versus another and provides a means of adjustment in the balance-of-payments mechanism

Question 13

factor endowment

Answer 13

The distribution of factors of production (land, labor, and capital) in a specific economy; each economy has a different factor endowment based on relative abun­dance of resources

Question 14

factor intensities

Answer 14

The different quantities of the factors of production necessary to produce a commodity

Question 15

factors of production

Answer 15

The inputs to economic production—land, labor, and capital

Question 16

foreign direct investment (FDI)

Answer 16

Investment in control of productive facilities overseas— usually defined by an investment that amounts to control of 10 percent or more of a company’s equity; see portfolio investment

Question 17

glasnost

Answer 17

Political reforms initiated by Mikhail Gorbachev that helped to unleash individual choice and broader citizen participation in political life of the Soviet Union in the 1980s

Question 18

Heckscher-Ohlin model

Answer 18

An economic framework that states that differences in factor endowments across nations produce comparative advantages

Question 19

invisible hand

Answer 19

An idea proposed by Adam Smith, theorizing that an unseen force guides self-interested individual behavior in competitive markets to promote the welfare of society without deliberate intent

Question 20

labor

Answer 20

The effort that men and women put into producing a commodity

Question 21

labor theory of value

Answer 21

A means of comparing production costs by focusing on the labor cost, or amount of labor time needed to produce a commodity

Question 22

land

Answer 22

Raw materials and physical resources available in nature, such as arable land, water, and raw materials either animal, vegetable, or mineral

Question 23

money

Answer 23

Any medium of exchange that can store value, serve as a unit of accounting and exchange, and help to create a bond between users of this currency and their state

Question 24

portfolio investment

Answer 24

An investment that amounts to less than 10 percent of equity in a firm, which insures that investors cannot exercise any control over the firm; a major component in the capital account that does not create control of an overseas facility; see foreign direct investment

Question 25

price mechanism

Answer 25

The cost factor that coordinates individual consumption preferences (demand), with producers’ activities (the supply of specific goods and services)

Question 26

production possibilities [curve]

Answer 26

The outer boundary of what an economy could conceivably produce given the resources and preferences of society

Question 27

productivity gains

Answer 27

Improvements in efficiency that occur when producers discover a means to reduce inputs per unit of production

Question 28

self-interest

Answer 28

The notion that people make choices based upon their hierarchy of preferences and their budgetary constraints

Question 29

specialization

Answer 29

An economic practice whereby each producer does not attempt to produce the entire range of commodities, but rather produces a commodity or supplies a service in which she has a comparative advantage

Question 30

Stolper-Samuelson theorem

Answer 30

An extension of the Heckscher-Ohlin model, recognizing that the liberalization of trade will benefit abundant factors of production in an economy

Question 31

supply

Answer 31

The amount of specific goods and services produced in response to consumer demand