International trade theory (Chapter 3)

Question 1

gains from trade

Answer 1

• trade allows specialization and encourages efficiency

Question 2

absolute advantage (AA)

Answer 2

• region holds absolute advantage over another in the production of commodity X if it requires a smaller amounts of inputs to produce a unit of X

Question 3

comparative advantage (CA)

Answer 3

• region has CA over another in the production of X if the opportunity cost of producing X is lower

Question 4

gains from trade illustration

Answer 4

• each country transfers sufficient worker time to produce 1 more unit of the good in which it has the CA

Question 5

Terms of Trade (ToT)

Answer 5

• quantity of imported goods obtainable per unit of exported goods