Chapter 19 Flashcards
What type of trade does an open economy engage in?
International trade
What type of trade does a closed economy engage in?
No foreign trade
What must everyone be without trade?
Self-sufficient
With trade, what can people do?
They can specialize in what they do well and satisfy other needs by trading
What are the gains of trade?
The increased output attributable to the specialization that is made possible by trade
What does absolute advantage reflect?
It reflects the differences in absolute costs of producing goods between countries
What do comparative advantages reflect?
They reflect the opportunity costs that differ between countries
Whenever opportunity costs differ between countries, ___ can increase the world’s production of both products
specialization
When does world output increase?
When countries specialize in the production of the goods in which they have a comparative advantage
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
comparative
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
increase
What must the economy do in the absence of international trade?
It must consume the same bundle of goods that it produces
What does the openness to trade with other countries change?
It changes the pattern of domestic production and creates further gains from trade
What can the pattern of absolute and comparative advantage be identified through?
- absolute dollar cost of producing two goods in two countries
- The amount of output of two goods that can be produced from available resources
If costs vary with the level of output, or as experience is acquired via specialization, ___ gains are possible
additional
In industries with significant scale economies, small countries that do not trade will have ___ levels of output and ___ costs
low
high
With international trade, small countries can produce for the large global market and produce at ___ costs
lower
What does international trade allow small countries to do?
It allows them to reap the benefits of scale economies
On which curve is the economy of scale shown?
On the slope of the LRAC curve
Learning by doing shifts the LRAC curve where?
Downwards
The shift downwards of the LRAC curve incorporates both what?
Economies of scale and learning by doing
What is described in Heckscher-Ohlin theory?
Countries have comparative advantages in the production of goods that use intensively the factors of production with which they are abundantly endowed
What is human capital?
People can acquire skills - human capital - that influence a country’s comparative advantage
If comparative advantage can be acquired, it can also be ___
lost
What does the law of one price state?
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
Is there a single world price?
Yes there is
What is the importance of modern supply chains?
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
Theory of comparative advantage is applicable for products with ___ ___ ___ ___
one or few components
What does the method of decentralized production indicate?
Access to low price and high quality imports
Access to world markets where we can sell out intermediate and final products
What is the terms of trade?
It is a ratio of the average price of a country’s exports to the average price of its imports
A rise in the price of imported goods with the price of exports unchanged indicates what?
A fall in the terms of trade
A rise in the price of exported goods, with the price of imports unchanged, indicates what?
A rise in the terms of trade
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?
It involves many countries and many products
How is a country’s terms of trade computed?
As an index number
What is the terms of trade equation?
Terms of Trade = Index of export prices/Index of import prices x 100
What is a rise in the index of the terms of trade called?
A favourable change in the economy’s terms of trade
What is a decrease in the index of the terms of trade called?
An unfavourable change in a country’s terms of trade
The terms of trade are quite ___, reflecting frequent changes in the relative prices of different products
Variable
