Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

Adam Smith

The basic idea of mercantilism was that wealth consisted of the goods and services produced by a nation.

The mercantilists would have objected to:

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.

"The equilibrium relative commodity price at which trade takes place is determined by the conditions of demand and supply for each commodity in both nations. Other things being equal, the nation with the more intense demand for the other nation's exported good will gain less from trade than the nation with the less intense demand." This statement was first proposed by:

The best explanation of the gains from trade that David Ricardo could provide was to describe only the outer limits within which the equilibrium terms of trade would fall. This is because Ricardo's theory did not recognize how market prices are influenced by:

In a two-country, two-product world, the statement "Japan enjoys a comparative advantage over France in steel relative to bicycles" is equivalent to:

A nation's trade triangle denotes its exports, imports, and terms of trade.

With increasing opportunity costs, comparative advantage depends on a nation's supply conditions and demand conditions; with constant opportunity costs, comparative advantage depends only on demand conditions.

Trade between two nations would $\underline { \text { not } }$ be possible if they have:

A nation that gains from trade will find its consumption point being located:

International trade is based on the notion that:

Table 2.3. Terms of Trade Export Price Index Import Price Index Country 1990 2004 1990 2004 Mexico 100 220 100 200 Sweden 100 160 100 150 Spain 100 155 100 155 France 100 170 100 230 Denmark 100 120 100 125 -Referring to Table 2.3, which countries' terms of trade $\underline { \text { improved } }$ between 1990 and 2004?

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. With international trade, what would be the maximum amount of steel that South Korea would be willing to export to Japan in exchange for each VCR?

Figure 2.4 Production Possibilities Frontier -In Figure 2.4 the marginal rate of transformation of wheat into autos is

A rise in the price of imports or a fall in the price of exports will:

If productivity in the German computer industry grows faster than it does in the Japanese computer industry, the opportunity cost of each computer produced in Japan increases relative to the opportunity cost of a computer produced in Germany.

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 specialization, Canada $\underline { \text { produces } }$

If the U.S. post-trade consumption point lies along its production possibilities schedule, the United States achieves a higher level of welfare with trade than without trade.

As a result of international trade, specialization in production tends to be: