Module 17.1: International Trade Benefits

Question 1

What is world price?

Answer 1

the price of a good or service in world markets for those to whom trade is not restricted

Question 2

What is trade surplus / deficit?

Answer 2

surplus - net exports are positive, value of goods exported is greater than imported

deficit - net exports are negative, value of goods exported is less than imported

Question 3

What is terms of trade?

Answer 3

the ratio of an index of the prices of a country’s exports to an index of the prices of its imports expressed relative to a base value of 100.

Question 4

What is the difference between gross national product and gross domestic product?

Answer 4

GDP = goods and services produced within a countries borders

GNP = similar to GDP, but measured the total value of goods and services produced by the labor and capital of a country’s citizens.

Question 5

What are the benefits and costs of international trade?

Answer 5

benefits - lower cost goods, higher employment and increased wages.

costs - domestic substitutes of imported product are negatively impacted.

Question 6

What is an absolute advantage vs. a comparative advantage?

Answer 6

absolute advantage - production of a good at a lower resource cost than another country.

comparative advantage - production of a good if the opportunity cost is lower

Question 7

How do you calculate opportunity cost if:

Portugal: can make 100 yards of cloth and 110 bottles of wine

England: can make 90 yards of cloth and 80 bottles of wine

Who has the comparative advantage?

Answer 7

Portugal:
OC for cloth = 110 / 100 = 1.1
OC for wine = 100 / 110 = .91

England:
OC for cloth = 80 / 90 = .89
OC for wine = 90 / 80 = 1.125

Portugal has the comparative advantage in wine b/c it’s opportunity cost is less than England. and vice versa for cloth and England.

Question 8

What is the production possibility frontier?

Answer 8

illustrates all combinations of food and machinery that an economy can produce (negative slope)

Question 9

What is the ricardian model of trade?

Answer 9

only ha one factor of production labor, the source of different production costs in Ricardo’s model is differences in labor productivity due to differences in technology.

Question 10

What is the Heckscher and Ohlin model?

Answer 10

two factors of production capital and labor. the difference between comparative advantage is the amount of each factor a country possesses.