Chapter 4: Foundations of International Trade

Question 1

Why does trade benefit 2 nations engaging in trade even if one is more productive in all fields?

Answer 1

• Ricardo: Benefits of trade emerge because of comparative advantages as a result of different opportunity costs
• possibility of mutually beneficial rearrangement of world production
• both countries can gain if they specialise on the production of goods with comparative advantages

Question 2

When will a country specialise on a certain product?

Answer 2

If relative price of the product is higher than it’s opportunity costs

Question 3

How will price range be determined that allows international trade?

Answer 3

• Price range determined by opportunity costs between countries
• Countries want to be better off after trading
• If price range is unattractive they can better produce at home

Question 4

Determinants of wages in Ricardian world with international trade

Answer 4

• Absolute advantages determine relative wages in both countries
• Higher wages paid if labor productivity is higher
• Large differences in wages between countries if labor productivity differs

Question 5

Can only highly productive countries benefit from global trade?

Answer 5

• less productive countries can gain if they specialise in their relative advantage and have free trade
• not productivity= absolute advantage, but relative advantage matters for gains from trade
• developing countries have to lower labor costs to become competitive
• economically: utility and income maximisation
• justice and fairness problem

Question 6

Will workers in rich countries be harmed by trade with low-wage countries?

Answer 6

• No, countries can specialise in product with comparative advantage an gain from trade
• buy products at lower price from other country
• If everything was produced at home, wages would be lower because production with relative disadvantages and lower wage

Question 7

Does international trade reduce low-skill wages and exploit workers in poor countries?

Answer 7

• No
• If countries produce at home with comparative disadvantages, wages would be even lower
• Lack of trade is harmful
• Additional income through gain from trade can be redistributed to workers so that their consumption can increase as well