Chapter 19

Question 1

An economy that engages in international trade is called an [. ]; one that does not is called a [. ]

Answer 1

open economy, closed economy

Question 2

One region is said to have an [. ] over another region in the production of good X when an equal quantity of resources can produce more X in the first region than in the second.

Answer 2

absolute advantage

Question 3

The [. ] is the dollar cost of the labour, capital, and other resources required to produce the goods.

Answer 3

absolute cost

Question 4

A country is said to have a [. ] in the production of good X if the cost of producing X in terms of forgone output of other goods is lower in that country than in another. Thus, the pattern of comparative advantage is based on [. ] rather than absolute costs.

Answer 4

comparative advantage, opportunity costs

Question 5

Whenever [. ] differ between countries, specialization can increase the world’s production of both products.

Answer 5

opportunity costs

Question 6

[. ] of production against the pattern of [. ] advantage leads to a decline in total world output.

Answer 6

Specialization, comparative

Question 7

The slope of the [. ] indicates the opportunity costs. The existence of different opportunity costs across countries implies [. ] that can lead to gains from trade.

Answer 7

production possibilities boundary, comparative advantages

Question 8

A diagrammatic illustration of the gains from trade appears where the production possibilities boundary is [. ] (which means that the opportunity cost for each good is higher when more of that good is being produced).

Answer 8

concave

Question 9

International trade leads to an expansion of the set of goods that can be consumed in the economy in two ways:

Answer 9

(1) By allowing the bundle of goods consumed to differ from the bundle produced, (2) By permitting a profitable change in the pattern of production

Question 10

The [. ] of producing X is the output of other products that must be sacrificed in order to increase the output of X by [. ]

Answer 10

opportunity cost,one unit.

Question 11

Country A has a comparative advantage over Country B in producing a product when its [. ] of production is lower. This implies, however, that Country A has a [. ] disadvantage in some other product(s).

Answer 11

opportunity cost, comparative

Question 12

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

Answer 12

no comparative advantage

Question 13

When opportunity costs differ in any two countries and both countries are producing both products, it is always possible to [. ] of both products by a [. ] of resources within each country.

Answer 13

increase total production, suitable reallocation

Question 14

[. ] fall as the scale of output increases

Answer 14

production costs

Question 15

To know the pattern of comparative advantage, we must calculate the [. ] of production.

Answer 15

opportunity costs

Question 16

different countries specialize in different versions of similar products, and then trade with one another. Such trade is referred to as [. ]trade and reflects the prevalence of scale economies and [. ] in many industries.

Answer 16

intra-industry, product differentiation

Question 17

In industries with differentiated products and significant scale economies, small countries that do not trade will have [. ] and therefore high costs. With international trade, however, small countries can produce for the [. ] and thus produce at lower costs. International trade therefore allows small countries to reap the benefits of scale economies.

Answer 17

low levels of output, large global market

Question 18

four Sources of Comparative Advantage:

Answer 18

(1)Different Factor Endowments, (2)Different Climates, (3)Human Capital, (4)Acquired Comparative Advantage

Question 19

The [. ] states that when a product is traded internationally, 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

Answer 19

law of one price

Question 20

Exports occur whenever there is [. ] at the world price

Answer 20

excess supply domestically

Question 21

If the world price is higher than the no-trade domestic price , there will be an [. ] of supply over Canadian demand.

Answer 21

excess

Question 22

Imports occur whenever there is [. ] at the world price.

Answer 22

excess demand domestically

Question 23

The case in support of a specific government intervention requires that 3 things:

Answer 23

(1) there is scope for governments to improve on the results achieved by the free market, (2) the costs of the intervention be less than the value of the improvement to be achieved, and (3) governments will actually be able to carry out the required interventionist policies

Question 24

A rise in the price of imported goods, with the price of exports unchanged, indicates a [. ] it will now take more exports to buy the same quantity of imports.

Answer 24

fall in the terms of trade

Question 25

a rise in the price of exported goods, with the price of imports unchanged, indicates a [. ]

Answer 25

rise in the terms of trade;

Question 26

A country’s terms of trade are computed as an index number:

Answer 26

Terms of trade = (index of export prices)/(index of import prices) x 100