Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

An improvement in a nation's terms of trade occurs if the prices of its exports rise relative to the prices of its imports over a given time period.

The equilibrium prices and quantities established after trade are $\underline { \text { fully } }$ determinate if we know:

According to Adam Smith, international trade was a "win-win" situation since all nations could enjoy gains from trade.

When a nation requires fewer resources than another nation to produce a product, the nation is said to have a:

The use of indifference curves helps us determine the point:

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

When a nation is in autarky and maximizes its living standard, its consumption and production points are:

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

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

If a production possibilities curve is $\underline { \text { bowed out } }$ (i.e., concave) in appearance, production occurs under conditions of:

Table 2.2. Output possibilities for South Korea and Japan $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Output per Worker per day }$ Caunty Tons of Steel VCR.s South Korea 80 40 Japan 20 20 -Refer to Table 2.2. According to the principle of absolute advantage, Japan should:

In autarky equilibrium, a nation realizes the lowest possible level of satisfaction given the constraint of its production possibilities schedule.

The trading principle formulated by Adam Smith maintained that:

Figure 2.2 illustrates trade data for Canada. The figure assumes that Canada attains international trade equilibrium at point $\underline { C . }$ Figure 2.2. Canadian Trade Possibilities -Consider Figure 2.2. With trade, Canada $\underline { \text { consumes } }$ :

Constant opportunity costs suggest that the relative cost of producing one product in terms of the other will remain the same no matter where a nation chooses to locate on its production-possibilities schedule.

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

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

Table 2.1. Output Possibilities of the U.S. and the U.K. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Output per Worker per day }$ Caunty Tons of Steel Televisians United States 5 45 United Kingdom 5 20 -Referring to Table 2.1, the United States has the absolute advantage in the production of:

The marginal rate of transformation equals the absolute slope of a country's production possibilities schedule.

The price-specie-flow mechanism illustrated why one nation's gains from trade were accompanied by another country's losses.