Review 8 Gaining from International Trade

Question 1

Production possibilities curve

Answer 1

A curve that outlines all possible combinations of total output that could be produced, assuming 1) a fixed amount of productive resources, 2) a given amount of technical knowledge, and 3) full and efficient use of those resources. The slope of the curve indicates the amount of one product that must be given up to produce more of the other.

Question 2

Comparative advantage

Answer 2

The ability to produce a good at a lower opportunity cost that others can produce it. Relative costs determine comparative advantage.

Question 3

Absolute advantage

Answer 3

A situation in which a nation, as a result of previous experience and/or natural endowments, can produce more of a good with the same amount of resources than another country can.

Question 4

tariff

Answer 4

a tax levied on goods imported into a country

Question 5

import quotas

Answer 5

a specific limit or maximum quantity (or value) of a good permitted to be imported into a country during a given period of time.

Question 6

dumping

Answer 6

selling a good in a foreign country at a lower price than it is sold for in the domestic market

Question 7

investment

Answer 7

The purchase, construction, or development of resources, including physical assets, such as plants and machinery, and human assets, such as better education. Investment expands an economy’s resources. The process of investment is sometimes called capital formation.

Question 8

technology

Answer 8

the technical knowledge available in an economy at a given time. The level of technology determines the amount of output we can generate with our limited resources.

Question 9

division of labor

Answer 9

A method that breaks down the production of a product into a series of specific tasks, each performed by a different worker.

Question 10

law of comparative advantage

Answer 10

A principle that states that individuals, firms, regions, or nations can gain by specializing in production of goods that they produce cheaply (at a low opportunity cost) and exchanging them for goods they cannot produce cheaply (at a high opportunity cost).

Question 11

international trade

Answer 11

Any commerce that takes place across political borders. Any trade between people in different countries.

Question 12

exports

Answer 12

goods or services sold to foreign interests in exchange for currency

Question 13

imports

Answer 13

good and services purchased from foreign interests in exchange for currency

Question 14

Consumption possibilities curve

Answer 14

A curve that outlines all possible combinations of total consumption, assuming 1) a fixed amount of productive resources, 2) a given amount of technical knowledge, 3) full and efficient use of those resources, and 4) free trade.

Question 15

capital inflow

Answer 15

occurs when foreign interests acquire assets in this country

Question 16

capital outflow

Answer 16

occurs when domestic interests acquire assets in another country

Question 17

trade deficit

Answer 17

When the dollar value of a country’s imports exceeds the dollar value of its exports. Net capital outflow.

Question 18

trade surplus

Answer 18

country exports more than it imports. Net capital inflow.

Question 19

free trade

Answer 19

a government allows its citizens to engage in international trade without any restrictions of any kind.

Question 20

protection

Answer 20

any policy that restricts trade in order to protect a domestic industry from foreign competition