Chapter 2

Question 1

price-specie-flow doctrine

Answer 1

A favorable trade balance is possible only in the short run, for over time it would automatically be eliminated.

Question 2

labor theory of value

Answer 2

Within each nation, labor is the only factor of production and is homogeneous, and the cost of a good depends exclusively on the amount of labor required to produce it. (Smith).

Question 3

production possibilities schedule (aka transformation schedule)

Answer 3

Shows various alternative combinations of two goods that a nation can produce when a lll of its factor inputs are see in their most efficient manner.

Question 4

autarky

Answer 4

absence of trade

Question 5

terms of trade

Answer 5

the rate at which a country export product is traded for the other country’s export product.

Question 6

commodity terms of trade

Answer 6

Measures the relation between the prices a nation gets for its exports and the prices it pays for its imports.

Question 7

comparative advantage

Answer 7

producing a good with lower or lowest opportunity cost of production

Question 8

specialization

Answer 8

the use of resources to produce some, but not all, goods required by society

Question 9

terms of trade

Answer 9

relative prices of a country’s exports and imports.

Question 10

exit barriers

Answer 10

Various cost conditions that make lengthy exit a rational response by companies.