Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

Unlike Adam Smith, David Ricardo's trading principle emphasizes the:

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

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 -Refer to Table 2.1. Mutually advantageous trade will occur between the United States and the United Kingdom so long as one ton of steel trades for:

The theory of reciprocal demand best applies when one country has a "large" economy and the other country has a "small" economy.

If the international terms of trade lies beneath (inside) the Mexican cost ratio, Mexico is worse off with trade than without trade.

Unlike the mercantilists, Adam Smith maintained that:

Because the Ricardian theory of comparative advantage was based only on a nation's demand conditions, it could not fully explain the distribution of the gains from trade among trading partners.

The trading-triangle concept is used to indicate a nation's:

Is it possible to estimate the gains from trade?

The Ricardian model of comparative advantage is based on all of the following assumptions $\underline {\text { except }}$

The domestic cost ratios of nations set the outer limits to the equilibrium terms of trade.

Ricardo's theory of comparative advantage does not take into account demand conditions when determining relative commodity prices.

The price-specie-flow mechanism illustrated why nations could not maintain trade surpluses or trade deficits over the long run.

Assume that Canada has a comparative advantage in wheat and a comparative disadvantage in autos. As the Canadian demand for wheat increases, Canada's equilibrium terms of trade improves.

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 -According to Figure 2.2, $\underline { \text { exports } }$ for Canada total:

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.

All of the following may be exit barriers except

Assume that Germany has higher labor productivity and higher wage levels than France. Germany can produce a commodity more cheaply than France if its productivity differential more than offsets its wage differential.

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

The Ricardian theory of comparative advantage could fully explain the distribution of the gains from trade among trading partners.