Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

Assume 1990 to be the base year.If by the end of 2004 a country's export price index rose from 100 to 130 while its import price index rose from 100 to 115,its terms of trade would equal 113.

If the international terms of trade settle at a level that is between each country's opportunity cost:

A term-of-trade index that equals 90 indicates that compared to the base year:

Is it possible for comparative advantage to change,thus changing the direction of trade?

Table 2.2.Output possibilities for South Korea and Japan -Referring to Table 2.2,the opportunity cost of one VCR in Japan is:

If Japan and France have identical production possibilities curves and identical community indifference curves:

Given free trade,small nations tend to benefit the most from trade since they:

Incomplete specialization may be caused by

Under free trade,Canada would not enjoy any gains from trade with Sweden if Canada:

The mercantilists maintained that a free-trade policy best enhances a nation's welfare.

Compared to Ricardian trade theory,modern trade theory provides a more general view of comparative advantage since it is based on all factors of production rather than just labor.

Complete specialization usually occurs under the assumption of increasing opportunity costs.

If Canada experiences increasing opportunity costs,its supply schedule of steel will be:

Assume that the United States and Canada engage in trade.If the international terms of trade coincides with the U.S.cost ratio,the United States realizes all of the gains from trade with Canada.

Assume that the United States is more efficient than the United Kingdom in the production of all goods.Mutually beneficial trade is possible according to the principle of absolute advantage,but is impossible according to the principle of comparative advantage.

Advocates of outsourcing by American firms maintain that its advantages consist of

The principle of comparative advantage contends that a nation should specialize in and export the good in which its absolute advantage is smallest or its absolute disadvantage is greatest.

The terms of trade is given by:

Adam Smith contended that gold,silver,and other precious metals constituted the wealth of a nation.

The basis for trade is explained by the principle of absolute advantage according to David Ricardo and the principle of comparative advantage according to Adam Smith.