Chapter 19

Question 1

What type of trade does an open economy engage in?

Answer 1

International trade

Question 2

What type of trade does a closed economy engage in?

Answer 2

No foreign trade

Question 3

What must everyone be without trade?

Answer 3

Self-sufficient

Question 4

With trade, what can people do?

Answer 4

They can specialize in what they do well and satisfy other needs by trading

Question 5

What are the gains of trade?

Answer 5

The increased output attributable to the specialization that is made possible by trade

Question 6

What does absolute advantage reflect?

Answer 6

It reflects the differences in absolute costs of producing goods between countries

Question 7

What do comparative advantages reflect?

Answer 7

They reflect the opportunity costs that differ between countries

Question 8

Whenever opportunity costs differ between countries, ___ can increase the world’s production of both products

Answer 8

specialization

Question 9

When does world output increase?

Answer 9

When countries specialize in the production of the goods in which they have a comparative advantage

Question 10

When opportunity costs for all products are the same in all countries, there is no ___ advantage and no possibility of gains from specialization of trade

Answer 10

comparative

Question 11

When opportunity costs differ in any two countries and both countries are producing both products, it is always possible to ___ production of both products by a suitable reallocation of resources within each country

Answer 11

increase

Question 12

What must the economy do in the absence of international trade?

Answer 12

It must consume the same bundle of goods that it produces

Question 13

What does the openness to trade with other countries change?

Answer 13

It changes the pattern of domestic production and creates further gains from trade

Question 14

What can the pattern of absolute and comparative advantage be identified through?

Answer 14

1. absolute dollar cost of producing two goods in two countries
2. The amount of output of two goods that can be produced from available resources

Question 15

If costs vary with the level of output, or as experience is acquired via specialization, ___ gains are possible

Answer 15

additional

Question 16

In industries with significant scale economies, small countries that do not trade will have ___ levels of output and ___ costs

Answer 16

low
high

Question 17

With international trade, small countries can produce for the large global market and produce at ___ costs

Answer 17

lower

Question 18

What does international trade allow small countries to do?

Answer 18

It allows them to reap the benefits of scale economies

Question 19

On which curve is the economy of scale shown?

Answer 19

On the slope of the LRAC curve

Question 20

Learning by doing shifts the LRAC curve where?

Answer 20

Downwards

Question 21

The shift downwards of the LRAC curve incorporates both what?

Answer 21

Economies of scale and learning by doing

Question 22

What is described in Heckscher-Ohlin theory?

Answer 22

Countries have comparative advantages in the production of goods that use intensively the factors of production with which they are abundantly endowed

Question 23

What is human capital?

Answer 23

People can acquire skills - human capital - that influence a country’s comparative advantage

Question 24

If comparative advantage can be acquired, it can also be ___

Answer 24

lost

Question 25

What does the law of one price state?

Answer 25

It states that when a product is traded throughout the entire world , the prices in various countries (net of any specific taxes or tariffs) will differ by no more than the cost of transporting the product between countries

Question 26

Is there a single world price?

Answer 26

Yes there is

Question 27

What is the importance of modern supply chains?

Answer 27

Economies of scale and globalization has led to complex global supply chains and these supply chains affect the way we think about comparative advantage and international trade

Question 28

Theory of comparative advantage is applicable for products with ___ ___ ___ ___

Answer 28

one or few components

Question 29

What does the method of decentralized production indicate?

Answer 29

Access to low price and high quality imports
Access to world markets where we can sell out intermediate and final products

Question 30

What is the terms of trade?

Answer 30

It is a ratio of the average price of a country’s exports to the average price of its imports

Question 31

A rise in the price of imported goods with the price of exports unchanged indicates what?

Answer 31

A fall in the terms of trade

Question 32

A rise in the price of exported goods, with the price of imports unchanged, indicates what?

Answer 32

A rise in the terms of trade

Question 33

What does international trade involve that prevents us from using the simple ration of the prices of two goods to calculate the terms of trade?

Answer 33

It involves many countries and many products

Question 34

How is a country’s terms of trade computed?

Answer 34

As an index number

Question 35

What is the terms of trade equation?

Answer 35

Terms of Trade = Index of export prices/Index of import prices x 100

Question 36

What is a rise in the index of the terms of trade called?

Answer 36

A favourable change in the economy’s terms of trade

Question 37

What is a decrease in the index of the terms of trade called?

Answer 37

An unfavourable change in a country’s terms of trade

Question 38

The terms of trade are quite ___, reflecting frequent changes in the relative prices of different products

Answer 38

Variable