Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

With trade, a country will $\underline { \text { maximize } }$ its satisfaction when it:

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. In the absence of trade, Canada would produce and consume:

Assume that labor is the only factor of production and that wages in the United States equal $20 per hour while wages in the United Kingdom equal $10 per hour. Production costs would be lower in the United States than the United Kingdom if:

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 $\underline { \text { worsened } }$ between 1990 and 2004?

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

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.

For the commodity terms of trade to improve, a country's import price index must rise relative to its export price index over a given time period.

Introducing indifference curves into our trade model permits us to determine:

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 Kingdom gains most from trade if:

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 -Referring to Table 2.2, the opportunity cost of one VCR in South Korea is:

Ricardo's theory of comparative advantage was of limited real-world validity because it was founded on the:

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 Kingdom has a comparative advantage in the production of:

The introduction of community indifference curves into our trading example focuses attention on the nation's:

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.

Improvements in productivity may lead to decreasing comparative costs if

Which of the following terms-of-trade concepts is calculated by dividing the change in a country's export price index by the change in its import price index between two points in time, multiplied by 100 to express the terms of trade in percentages?

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

Figure 2.4 Production Possibilities Frontier -In Figure 2.4 one ton of wheat can be produced at a cost of

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 opportunity cost of producing one ton of steel in the United States is:

The theory of reciprocal demand asserts that as the U.S. demand for Canadian wheat rises, the equilibrium terms of trade improve for the United States.