Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

Modern trade theory recognizes that the pattern of world trade is governed by both demand conditions and supply conditions.

A nation benefits from international trade if it can achieve a higher indifference curve than it can in autarky.

International economists use production possibilities curve to help explain

International trade leads to increased welfare if a nation can achieve a post-trade consumption point lying inside of its production-possibilities schedule.

The expression "importance of being unimportant" suggests that if one nation is much larger than the other,the larger nation realizes most of the gains from trade while the smaller nation realizes fewer gains from trade.

According to the principle of absolute advantage,international trade is beneficial to the world if one nation has an absolute cost advantage in the production of one good while the other nation has an absolute cost advantage in the other good.

Figure 2.1.Production Possibilities Schedule -Referring to Figure 2.1,the relative cost of steel in terms of aluminum is:

Suppose that international trade results in an outward shift in a country's production possibilities curve.This would be described as

According to the mercantilists,a nation's welfare would improve if it maintained a surplus of exports over imports.

With constant opportunity costs,a nation will achieve the greatest possible gains from trade if it partially specializes in the production of the commodity of its comparative disadvantage.

By reducing the overall volume of trade,import restrictions tend to reduce a nation's gains from trade.

Referring to the textbook's example of Babe Ruth,the famous player for the New York Yankees-- Ruth switched from being a pitcher to being an outfielder and batter because of the

In justifying its production outsourcing strategy,Apple Inc.notes that American workers lack the speed and flexibility the firm needs to produce its electrical products such as Ipod and Ipad.

If a country's terms of trade worsen,it must exchange fewer exports for a given amount of imports.

Because the Ricardian trade theory recognized only how supply conditions influence international prices,it could determine:

If a country's terms of trade improve,it must exchange more exports for a given amount of imports.

Figure 2.2 illustrates trade data for Canada.The figure assumes that Canada attains international trade equilibrium at point C. Figure 2.2.Canadian Trade Possibilities -Referring to Figure 2.2,Canada has a comparative advantage in:

Because the Ricardian theory of comparative advantage was based only on a nation's supply conditions,it could only determine the outer limits within which the equilibrium terms of trade would lie.

Figure 2.2 illustrates trade data for Canada.The figure assumes that Canada attains international trade equilibrium at point C. Figure 2.2.Canadian Trade Possibilities -According to Figure 2.2,imports for Canada total:

Table 2.1.Output Possibilities of the U.S.and the U.K. -Refer to Table 2.1.If trade opens up between the United States and the United Kingdom,American firms should specialize in producing: