Chapter 9 Flashcards
What is the principle of comparative advantage?
The principle of comparative advantage is that as long as the relative opportunity costs of producing goods differ among countries, then there are potential gains from trade
What is an opportunity cost?
Opportunity cost is what must be given up in one good in order to get another good
What are the three determinants of trade?
The more competition, the less the trader gets
Smaller countries get a larger proportion of the gain than larger countries
Countries producing goods with economies of scale get a larger gain from trade
What are inherent comparative advantages?
Inherent comparative advantages are based on factors that are relatively unchangeable, such as resources and climate
What are transferable comparative advantages?
Transferable comparative advantages are based on factors that can change relatively easily, such as capital, technology, and types of labor
What is the law of one price?
The law of one price means that in a competitive market, there will be pressure for equal factors to be priced equally
What is the convergence hypothesis?
The convergence hypothesis is the tendency of economic forces to eliminate transferable comparative advantage
What is the exchange rate?
The exchange rate is the price of one currency in terms of another one.
What is a currency deprivation?
A currency depreciation is a change in the exchange rate so that one currency buys fewer units of a foreign currency
What is a currency appreciation?
A currency appreciation is a change in the exchange rate so that one currency buys more units of a foreign currency
What is the resource curse?
The presence of the resource curse: the paradox that countries with an abundance of resources tend to have lower economic growth and more unemployment than countries with fewer natural resources
