chapter 14: Comparative Advantage and the Gains from Trade

Question 1

The term defining the improvement in national welfare

Answer 1

gains from trade

Question 2

mercantilism

Answer 2

term that Adam Smith roasted

the system of nationalistic economics that dominated economic thought in the 1700s

stressed exports over imports, primarily as a way to obtain revenues for building armies and national construction projects

Question 3

The key mistake in mercantilist thinking

Answer 3

the belief that trade was a zero sum activity

Question 4

zero sum activity

Answer 4

one wins, the other loses

Question 5

Ricardian model assumptions

Answer 5

there are only two countries, producing two goods, using one input (labor)

firms are price takers, or, in other words, markets are competitive, and no firm has market power

technology is constant and there are no learning effects of production that might make firms and industries more productive over time

labor is perfectly mobile between industries but perfectly immobile across national borders

Question 6

productivity in the Ricardian model

Answer 6

the amount of output obtained from a unit of input

Question 7

labor productivity

Answer 7

(units of output)/(hours worked)

Question 8

absolute productivity advantage

Answer 8

producing more of a good with the same amount of input than other countries

Question 9

opportunity cost of productivity

Answer 9

what you could have produced of another good in units instead of what you actually produced

Question 10

static gains from trade

Answer 10

gains from trade opening that occur immediately

Question 11

dynamic gains from trade

Answer 11

gains from trade opening that occur over time

Question 12

why are dynamic gains from trade difficult to predict?

Answer 12

they depend on changes in innovation and productivity

Question 13

why is it hard to measure gains from trade?

Answer 13

static gains from trade and dynamic gains from trade

all countries already trade, so most of what is measured are the potential gains from some additional amount of trade and not the benefits or gains that a country currently has from participating in trade

Question 14

production possibilities curve (PPC)

Answer 14

shows the trade-offs a country faces when it chooses its combination of different products

Question 15

what is the slope of a straight production possibilities curve (PPC)?

Answer 15

the opportunity cost of giving up one product for another

Question 16

relative price

Answer 16

it is not in monetary units, but rather in units of the other good

the relative price of a good must be equal to its opportunity cost in production

Question 17

The term that defines the complete absence of trade

Answer 17

autarky

Question 18

in an autarky, to what is consumption limited to?

Answer 18

to the goods that are produced at home

Question 19

consumption possibilities curve (CPC)

Answer 19

defined by the going relative price of a good

shows different levels that a good is worth of another good

Question 20

pre trade, what is the level of consumption available?

Answer 20

the point which at which the PPC and CPC meet

in the absence of trade, consumption must equal production

Question 21

what is the effect of specializing on the CPC

how does it do this?

Answer 21

the CPC moves to the right since now you have much more goods available to consume

it maximizes the producing country’s income

Question 22

Absolute productivity advantage

Answer 22

defined as having higher labor productivity

Question 23

when does a country have a comparative productivity advantage in a good?

Answer 23

if its opportunity costs of producing a good are lower than those of its trading partners

Question 24

what is more important in trade:

absolute advantage or comparative advantage?

Answer 24

comparative advantage

Question 25

is making policies that enrich corporations and make them more efficient always the best allocation of a nation’s resources?

Answer 25

nah

ex: Indonesia and airplanes

Question 26

what is a mistake that is often made regarding comparative advantage of nations with other nations?

why is it a mistake?

Answer 26

the mistake is that some people want nations to act as business

nations do not compete with each other in any normal sense of the word

Economic relations between any pair of nations are not equivalent to the commercial competition that exists between companies such as Coke and Pepsi

Question 27

Economic restructuring

Answer 27

changes in the economy that may require some industries to grow and others to shrink or disappear altogether

Question 28

does opening trade always benefit every individual?

why or why not?

Answer 28

nah boy

often requires stopping or reducing an industry in the country

opening an economy to increased foreign competition is rarely painless and usually generates a number of new problems

some laid-off workers in a declining industry may quickly find new jobs, many do not

Question 29

what is the reasoning behind the people that believe that the government SHOULD NOT do anything to help losers of trade?

Answer 29

argue that government should not have any policies for handling unemployment caused by the rapid growth of imports

unemployment is a self-correcting problem; laid-off workers will look for new jobs and will, if necessary, accept lower wages

Question 30

what is the reasoning behind the people that believe that the government SHOULD do anything to help losers of trade?

Answer 30

the nation as a whole benefits from trade, so there are newly added resources to the economy that make compensation possible

many people believe that they have an ethical obligation to assist people hurt by economic change

compensation reduces the incentives to oppose foreign trade

Question 31

trade adjustment assistance (TAA)

Answer 31

these programs take the form of extended unemployment benefits and worker re-training

ex: NAFTA

Question 32

how to qualify to the trade adjustment assistance (TAA) NAFTA?

Answer 32

workers must demonstrate that they were laid off as a result of imports from Mexico or Canada or because their firm relocated to one of those countries

Question 33

The single most important determinant of trade patterns

Answer 33

the opportunity cost of producing traded goods

Question 34

Countries that sacrifice the least amount of alternative production when producing a particular good have the highest or lowest opportunity cost?

Answer 34

lowest opportunity cost

Question 35

Countries that sacrifice the least amount of alternative production when producing a particular good have or don’t have a comparative advantage?

Answer 35

do have one

Question 36

how do countries maximize the benefits they receive from trade and, consequently, their national welfare?

Answer 36

Nations that produce according to their comparative advantage

Question 37

is it necessary to have an absolute advantage in order to have a comparative advantage?

Answer 37

nah