Determinants of Trade in a Simple Exchange Economy Quiz

Determinants of Trade in a Simple Exchange Economy

• The Ricardian model demonstrates that trade can benefit countries, but it depends on assumptions made in the model.
• The pure exchange model shows that trade leads to income redistribution, with both winners and losers.
• The terms of trade is defined as how much of one good trades for one unit of another good in the market.
• The terms of trade depend on factors such as preferences, uncertainty, scarcity, size, quality, effort, persuasion, and expectations.
• Trade decisions are based on expected utility, but the utility received may be less than expected due to imperfect information.
• Government policies such as taxes or penalties for misrepresentation can affect the terms of trade.
• Coercion can distort trade and result in one party getting all the goods without giving anything in exchange.
• Trade is a positive-sum game, where both sides benefit from voluntary exchange.
• The introduction of a third farmer can change the relative scarcities of goods and affect the terms of trade.
• In a three-farmer market, one farmer may have a stronger negotiating position while others compete against each other.
• Trade can lead to winners and losers, as seen in the example where one farmer gains a better deal while another loses out.
• The model highlights the importance of considering various factors in determining the terms of trade and potential income redistribution.