chapter 3 Flashcards
Explain the concept of interdependence in economies
Individuals and countries rely on each other for goods and services.
Example: A country that produces electronics may trade with a country that produces textiles. Each benefits from the trade, accessing goods that are not easily available domestically.
What is globalization
The increasing interdependence of economies through trade and investment.
Explain specialization and trade
Specialization allows entities to produce more efficiently.
Example: A country specializing in technology exports tech products and imports agricultural goods.
What is comparative advantage
The ability to produce a good at a lower opportunity cost compared to others.
What is the difference between comparative advantage and absolute advantage
Comparative advantage is about lower opportunity costs, while absolute advantage is about higher productivity.
Example: If Country A can produce both cars and computers more efficiently than Country B, but A has a lower opportunity cost for cars, A should specialize in cars, and B in computers.
What is David Ricardo’s Theory
Comparative advantage is the foundation of international trade.
How does trade benefit all parties
Trade benefits all parties through specialization and exchange.
Example: Countries can produce what they are best at and trade for other goods, increasing overall consumption and welfare.
Explain gains from trade
Increases in total output and consumption opportunities for all trading partners.
How does trade expand choices
Trade increases the range of goods and services available.
Example: Access to foreign products allows consumers to enjoy a variety of goods, such as exotic fruits or international cuisines.
What is economic Efficiency
Trade improves the allocation of resources and enhances economic efficiency.
How does trade benefit both parties
Both trading parties can benefit from trade.
Example: If two countries specialize based on comparative advantage, both can enjoy more goods than they could produce on their own.
What is mutual gains
Trade allows countries to consume beyond their individual PPFs.
What is the role of trade policy
Trade policies affect the extent and nature of trade between countries.
Example: Tariffs increase the price of imported goods, potentially protecting domestic industries but also leading to higher prices for consumers.
What are trade barriers
Tariffs, quotas, and subsidies can distort market outcomes.
What are international trade agreements
Agreements facilitate trade between countries.
Example: NAFTA (now USMCA) created a free trade area between the US, Canada, and Mexico, reducing trade barriers and increasing trade volumes.
