Terms of Trade

Question 1

When does comparative advantage occur?

Answer 1

When a country can produce a good or service at a lower opportunity cost than another. (country produces a good relatively cheaper than another)

Question 2

What does the theory of comparative advantage state?

Answer 2

states that if countries specialise in producing goods where they have a lower opportunity cost - then there will be an increase in economic welfare. (economic welfare is someones standard of living)

Question 3

What does absolute advantage look at?

Answer 3

looks at the monetary cost of producing a good

Question 4

What is comparatve advantage, when applied, thought to significantly increase?what may it mean?

Answer 4

volumes of world trade, this means higher income for individual countries and higherr incomes globally.

Question 5

How do you calculate terms of trade?

Answer 5

index of exports divided by index of imports x 100

Question 6

What is the Heckscher Ohlin theory?

Answer 6

A country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively