Chapter 9 Flashcards
Comparative advantage
As long as the relative opportunity costs of producing goods differ among countries gains can be made from trade
Q - 1: if the opportunity cost of oil for food were the same for both the United States and Saudi Arabia what should I.T. do?
He should walk away because there is no basis for trade
3 determinants of the terms of trade are
- The more competition the less the Trader gets
- Smaller countries get a larger portion of the gain than larger countries
- Countries producing goods with economies of scale get a larger gain from trade
Q - 2: in what circumstances would a small country not get the larger percentage of the gains from trade?
The percentage of gains from trade that goes to a country depends upon the change in the price of the goods being traded. (See more in book)
Balance of trade
The difference between the value of export and the value of imports
Q - 3: what are four reasons for the difference between lay-peoples and economists views of trade ?
- Gains from trade are often stealth gains
- Comparative advantage is determined by more than wages
- Nations trade more than just manufactured goods
- Trade has distributional effects
4 reasons economists and laypeople differ in their views of trade are:
- Gains are often stealth
- Opportunity cost is relative
- Trade is broader than manufactured goods
- Trade has distributional effects
Q - 4: why has globalization caused employment and wages to decline in the manufacturing sector but not in the education, government, and health care sectors?
The manufacturing sector produces tradable goods, which has made it vulnerable to international trade. Foreign producers can produce these goods at a lower cost, putting downward pressure in wages and employment. Production in education, health care, and government sectors is less tradable, making it less subject to pressure from globalization.
Inherent comparative advantages
Comparative advantages that are based on factors that are relatively unchangeable
Transferable comparative advantages
Comparative advantages based on factors that can change relatively easily
Law of one price
In a competitive market there will be pressured for equal factors to be priced equally
Q - will transferable or inherent comparative advantages be more impacted by the law of one price? Why?
Transferable comparative advantage because it is an advantage not tied to a particular country. Countries where prices are higher will face outflow of capital and technology to bring prices back in balance. This will transfer comparative advantage from the high price countries to the low price countries.
Trade deficits
When imports exceed exports
Trade surpluses
When exports exceed imports
Q - 6: what are Teo likely adjustments that will reduce the trade deficit between China and the United States?
The fall in the value of the dollar (U.S. exchange rate) and a ride in Chinese wages relative to U.S. wages.
