Exam 2: Foundations of Modern Trade Theory: Comparative Advantage

A nation realizes maximum gains from trade at the point where the international terms-of-trade line is tangent to its community indifference curve.

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.

Is it possible to add up the preferences of all consumers in an entire nation?

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

If Japan loses competitiveness in computers,Japanese computer workers lose jobs to foreign computer workers and the wages of Japanese computer workers tend to fall relative to the wages of foreign computer workers.

Table 2.2. Output possibilities for South Korea and Japan -Referring to Table 2.2,the opportunity cost of one VCR in South Korea is:

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

John Stuart Mill's theory of reciprocal demand best applies when trading partners:

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.

Assume 1990 to be the base year.If by the end of 2004 a country's export price index rose from 100 to 140 while its import price index rose from 100 to 160,its terms of trade would equal 120.

According to J.S.Mill,if we know the domestic demand expressed by both trading partners for both products,the equilibrium terms of trade can be defined.

The terms of trade is given by the prices:

The dynamic gains from trade include all of the following except:

The commodity terms of trade are found by dividing a country's import price index by its export price index.

Although J.S.Mill recognized that the region of mutually beneficial trade is bounded by the cost ratios of two countries,it was not until David Ricardo developed the theory of reciprocal demand that the equilibrium terms of trade could be determined.

According to the principle of comparative advantage,specialization and trade increase a nation's total output since:

Table 2.1. Output Possibilities of the U.S. and the U.K. -Referring to Table 2.1,the opportunity cost of producing one ton of steel in the United States is:

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

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

Improvements in productivity may lead to decreasing comparative costs if