chapter 2 Flashcards
Economic philosophy in 17th and 18th centuries, in England, Spain, France, Portugal and the Netherlands.
Mercantilism
Belief that nation could become rich and powerful only by exporting more than it imported.
Mercantilism
Mercantilism is an Economic philosophy in 17th and 18th centuries, in what countries?
England, Spain, France, Portugal and the Netherlands.
According to Mercantilism Export surpluses brought inflow _______
inflow of gold and silver
Trade policy was to encourage exports and restrict imports
The Mercantilists’ Views on Trade
One nation gained only at the expense of another.
The Mercantilists’ Views on Trade
Mercantilists measured wealth of a nation by____.
stock of precious metals it possessed
Today, we measure wealth of a nation by its ______
stock of human, man-made and natural resources available for producing goods and services.
The greater the _______, the greater the flow of goods and services to satisfy human wants, and the higher the standard of living.
stock of resources
Trade Based on Absolute Advantage by?
Adam Smith
A nation has _______over another nation if it can produce a commodity more efficiently.
absolute advantage
This can take place if both countries specialize in their absolute advantage
Mutually beneficial trade
Adam Smith and other classical economists advocated a policy of _______, or minimal government interference with economic activity.
laissez-faire
This would cause world resources to be utilized most efficiently, maximizing world welfare.
Free trade
These 2 benefit both countries.
Specialization and trade
Even if one nation is less efficient than (has absolute disadvantage with respect to) the other nation in production of both commodities, there is still a basis for mutually beneficial trade.
Law of Comparative Advantage
The original idea of comparative advantage was based on the
labor theory of value:
The value or price of a commodity depends exclusively on the amount of labor used to produce it.
labor theory of value
The opportunity cost of a good is the amount of a second good that must be given up to release just enough resources to produce one additional unit of the first good
opportunity cost theory
A curve that shows alternative combinations of the two commodities a nation can produce by fully using all resources with best available technology.
Production Possibilities Frontier
In the absence of trade, a nation’s production possibilities frontier also represents its
consumption frontier/supply function
With complete specialization in both nations, the equilibrium-relative commodity price of each commodity lies between the _______in each nation.
pretrade relative commodity price
What demonstrates “the importance of being unimportant.”
small country case,
Argued that costs of production would be lower in the U.S. in industries where U.S. labor was more than twice as productive as U.K. labor.
McDougall (1951 and 1952)
McDougall found positive relationship between ____ and _____; that supports Ricardian Theory
labor productivity and exports
In the 17th century a group of men (merchants, bankers, government officials, and philosophers) wrote essays on international trade that advocated an economic philosophy known as
Mercantilism
In their view, a country becomes rich if it exports more than it imports
The Mercantilists’ View on Trade
*The accumulation of precious metals means a _______and_______ nation.
richer, more powerful
■Countries have to do their best to increase exports and restrict imports.
Mercantilism
was measured by the stock of metals they possess.
Wealth of nations
In contrast, today we measure wealth of a nation by its _______ available for producing goods and services.
stock of human, man-made, and natural resources
■Mercantilists advocated strict government control of economic activity because gain from trade comes at the expense of other nations
(i.e. zero-sum-game).
the most
influential of the mercantilist writers, and his Eng
land’s Treasure by Foreign Trade was the outstanding
exposition of mercantilist thought on trade.
Thomas Munn
According to __________, trade between two nations is based on absolute advantage.
Adam Smith
He advocated that both the nations should gain from trade.
Adam Smith
According to Adam Smith, trade between two nations is based on
absolute advantage.
When one nation is more efficient than another in the
production of one commodity but is less efficient than the other nation in producing a second commodity, then both nations can
gain by each specializing in the production of the commodity of its
absolute advantage
When one nation is more efficient than another in the
production of one commodity
has an absolute advantage
A country less efficient than the other nation in producing a second commodity
(or has an absolute disadvantage
with respect to)
By this process, resources are efficiently utilized and the output of both commodities will rise
Absolute advantage
■In contrast to the mercantilists, Smith believed that all nations would gain from free trade and strongly advocated a policy of ________
laissez-faire:
■As little government interference with the economic system as possible.
laissez-faire:
In Absolute advantage_______ would lead to efficient use of resources and would maximize world welfare
■Free trade
are invariably
rationalized in terms of national welfare.
Trade restrictions
According to the law of ___________, even if one nation is less efficient than
(has an absolute disadvantage with respect to) the other nation in the production of both
commodities, there is still a basis for mutually beneficial trade.
comparative advantage
The first nation should specialize in the production and export of the commodity in which its absolute disadvantage
is smaller and import the commod
ity in which its absolute disadvantage is greater
Law of comparative advantage
Limitations of comparative advantage
- Oversimplified
- No transportation cost
- constant returns to scale
- Ignores differences in taste and preferences
- static model
A limitation of comparative advantage that states labor is only factor considered
Oversimplified
A limitation of comparative advantage that states it is unrealistic and may have an increasing and decreasing rts
constant returns to scale
A limitation of comparative advantage that states people or countries have a same demand
ignores differences in taste and preferences
A limitation of comparative advantage that states does not account changes in technology overtime
static model
■Belief that nation could become rich and powerful only by exporting more than it imported
Mercantilism
one country’s gain is another’s loss
zero sum game
A nation can export goods even if it has a comparative disadvantage in producing both the goods only when the wages it pays to labors are so low that eventually price of at least one commodity is lower than the nation which has a C.A
Comparative Advantage with Money
Thus, the nation with the lower _______in the production of a commodity has a comp-adv. in that commodity.
lower opportunity cost
How much is the trade deficit of the Philippines
4.8 billion dollars
Why does Thailand and vietnam has a high trade surplus compared to the Philippines
They have a manufacturing industry centered for exporting
This manages the gold reserves of The Philippines
BSP
Reasons for selling gold reserves
-to control inflation
-to boost foreign exchange rate
-to diversify investment
Considered the positive sum game
Comparative Advantage
