International Trade

Question 1

What is the pure exchange model?

Answer 1

A situation where there is no production and there is only fixed stock.
Only two countries (A and B)

Question 2

In Autarky, what does a country consume?

Answer 2

Only what it is endowed with.

Question 3

What is comparative advantage?

Answer 3

Ability to produce at a lower domestic opportunity cost than that of a trading partner. (David Ricardo)

Question 4

What is absolute advantage?

Answer 4

The ability to produce a good using fewer resources than another country. (Compares productivity)

Question 5

What is an iso-value line?

Answer 5

A budget line which is made up of two separate goods.

Question 6

What are the gains and losses for producers and consumers for an importing country?

Answer 6

Producers are worse off, while consumers are better off.

Trade raises the economic wellbeing of a nation as a whole.

Question 7

Other benefits of international trade?

Answer 7

1. Consumers enjoy increased variety.
2. Producers sell to larger markets and may be able to reduce costs through economies of scale.
3. Increased competition from abroad may reduce market power of some firms.