Exam 1 vocab

Question 1

Relative Price

Answer 1

The price of one good expressed in terms of another good

Question 2

Consumption Possinilities Frontier

Answer 2

A budget constraint showing the maximum amount of one good that an economy can consume for every quantity of the other

Question 3

Terms of Trade

Answer 3

The price of a country’s imported goods relative to the price of the good that it exports

Question 4

How do Terms of Trade improve?

Answer 4

The price of imports become less expensive relative to exports

Question 5

What do improved terms of trade do?

Answer 5

Increases the benefit of trade to a country while reducing the benefit to its trading partner

Question 6

Marginal Product of Labor

Answer 6

The amount of extra output produced by hiring one more worker

Question 7

Value of the Marginal Product of Labor

Answer 7

The extra revenue that a firm earns by hiring one more worker

Question 8

Absolute Advantage

Answer 8

When a country can produce more of a given good than the other country when they both use the same quantity of resources

Question 9

Real Wage

Answer 9

The quantity of goods that a person can buy with their wage

Question 10

Factor Intensity

Answer 10

A product is either labor intensive or capital intensive depending on what it uses more of per worker than the other product

Question 11

Factor abundance (and Scarcity)

Answer 11

A country is either labor abundant or capital abundant depending on what it uses more of per worker than the other country

Question 12

Theorem

Answer 12

A result that follows from applying accepted rules of logic to an underlying set of fundamental assumptions

Question 13

Leontief Paradox

Answer 13

Discovered by Wassily Leontief, an empirical finding that many capital-abundant countries tend to export relatively labor-intensive goods, which is in direct ccontradiction to the H-O model

Question 14

Heckscher-Ohlin Theorem

Answer 14

The capital abundant country will have a comparative advantage in the capital-intensive good; the labor abundant country will have a comparative advantage in the labor intensive good

Question 15

Stolper-Samuelson Theorem

Answer 15

Given the assumptions of the Heckscher-Ohlin model, trade reduces real income of the economy’s scarce factor

Question 16

Monopolistic Competition

Answer 16

A market structure that combines elements of monopoly (firm has some market power) with elements of perfect competition (easy entry and exit from the industry, so economic profit = 0)

Question 17

Intraindustry Trade

Answer 17

When a country both imports and exports goods from within the same industrial classification (imports and also exports cars)

Question 18

Outsourcing

Answer 18

when a firm moves some tasks that it had been doing itself to another firm, regardless of location

Question 19

Offshoring

Answer 19

When a firm moves some of the tasks that they had been doing in its own country to a foreign country. May or may not involve outsourcing

Question 20

Fragmentation

Answer 20

For many goods, production may involve multiple stages that can be undertaken by different firms in different locations

Question 21

Job Polarization

Answer 21

A situation where the shares of low-income and high-income jobs increase at the expense middle income jobs. Sometimes called “hollowing out”

Question 22

What does a Ricardian PPF look like and why?

Answer 22

Straight, diagonal line. The slope is the same regardless of how much good is being produced becuse there is a constant cost of production

Question 23

What does a Heckscher-Ohlin PPF look like and why?

Answer 23

Curved and downward sloping. The PPF gets steeper as more of X is produced. The opportunity cost of either product increases (and the other decreases) while more of that product is produced.

Question 24

What do you need to know to find the opportunity cost in Ricardian?

Answer 24

Marginal Products

Question 25

What do you need to know to find the opportunity cost in Hecksher Ohlin?

Answer 25

How much of each good is being produced in the economy

Question 26

How do you determine factor intensity?

Answer 26

X is Captial intensive: Kx/Lx > Ky/Ly
Y is Labor intensive: Ly/Ky > Lx/Kx

Question 27

What is the correct terminology of factor intensity?

Answer 27

Capital per worker, workers per unit of capital

Question 28

w/r

Answer 28

the cost of labor relative to the cost of capital (wage/capital cost)

Question 29

what does an increase in w/r cause?

Answer 29

firms will use relatively less labor and more capital to produce output, both sectors become less labor intensive

Question 30

Why is Demand for labor relative to capital downward sloping?

Answer 30

When labor becomes more expensive relative to capital, firms economize and use less labor

Question 31

Assume that Both factors can move between industries within a country

Answer 31

H-O, All workers within the same country make the same wage and all capital is paid the same rental rate

Question 32

Assume that the two industries have different factor intensities

Answer 32

H-O, This ensures that the PPF exhibits increasing opportunity cost (it gets steeper moving left to right)

Question 33

Assume that the two countries have different relative factor supplies

Answer 33

H-O, This implies that the Production Possibilites curves for the two countries are shaped differently

Question 34

Assume that goods can be traded between countries; factors of production cannot move between countries

Answer 34

A simplifying assumption that makes analysis easier

Question 35

Assume perfect competition in all markets

Answer 35

H-O, implies zero economic profit in equilibrium, so relative price equals opportunity cost

Question 36

Assume that both countries have access to the same technology

Answer 36

H-O, This rules out differences in technology as a basis for trade, focusing squarely on differences between countries in relative factor supplies

Question 37

Assume that technology is characterized by constant returns to scale

Answer 37

H-O, increasing or decreasing the use of all inputs by some proportion results in output increasing or decreasing by the same proportion, allowing us to define terms and state results in terms of ratios (proportions)

Question 38

Assume that when given the same relative prices, all consumers choose to consume the two goods in the same proportions

Answer 38

needed to clearly compare autarky relative prices between countries (not to worry about it)

Question 39

What does a flatter ppf mean in H-O?

Answer 39

There is a lower opportunity cost for the X axis good, implying factor abundance