Podcast
Questions and Answers
What defines absolute advantages?
What defines absolute advantages?
If one country is more efficient than another in producing both products, they will not trade with each other.
If one country is more efficient than another in producing both products, they will not trade with each other.
False
In the given example, which product has a comparative advantage for the domestic country?
In the given example, which product has a comparative advantage for the domestic country?
Neither cheese nor wine
Ricardo's model is based on the amount of ___ required to produce a product.
Ricardo's model is based on the amount of ___ required to produce a product.
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What is a characteristic of Ricardo's model?
What is a characteristic of Ricardo's model?
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The domestic country has an absolute advantage if it can produce more with the same resources.
The domestic country has an absolute advantage if it can produce more with the same resources.
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What is the opportunity cost ratio of cheese produced in the domestic country?
What is the opportunity cost ratio of cheese produced in the domestic country?
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Match the following terms with their definitions:
Match the following terms with their definitions:
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What is the opportunity cost of wine in terms of cheese for the domestic country?
What is the opportunity cost of wine in terms of cheese for the domestic country?
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Smith's and Ricardo's models of international trade both advocate for specialization and trade to increase efficiency and welfare.
Smith's and Ricardo's models of international trade both advocate for specialization and trade to increase efficiency and welfare.
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According to Ricardo’s theory, what is a reason for trade between two countries?
According to Ricardo’s theory, what is a reason for trade between two countries?
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Ricardo's trade model assumes ____________ in addition to full employment.
Ricardo's trade model assumes ____________ in addition to full employment.
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What are the limitations of classical international trade theories?
What are the limitations of classical international trade theories?
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Match the following international trade concepts with their descriptions:
Match the following international trade concepts with their descriptions:
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Free trade, full employment, and perfect competition are assumptions in Ricardo's model of international trade.
Free trade, full employment, and perfect competition are assumptions in Ricardo's model of international trade.
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What is the primary reason behind trade according to Ricardo’s theory?
What is the primary reason behind trade according to Ricardo’s theory?
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According to traditional trade theories, ____________ should be disregarded.
According to traditional trade theories, ____________ should be disregarded.
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Which of the following statements is NOT a common assumption in classical trade theories?
Which of the following statements is NOT a common assumption in classical trade theories?
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Study Notes
Absolute Advantage
- Absolute advantage describes a country's ability to produce more of a good or service with the same amount of resources than another country.
- Adam Smith introduced this concept.
- If one country is more efficient than another at producing all goods, they will still trade according to Ricardo's comparative advantage theory.
Comparative Advantage
- Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country.
- Key takeaway for comparative advantage: specialization and trade
- Opportunity cost is crucial in determining comparative advantage.
Example Calculation: Comparative Advantage
- If a country's opportunity cost of producing wine and cheese is the same (e.g., 1:1 exchange), it does not have a comparative advantage in either product.
Ricardo's Model Characteristics
- Ricardo's model emphasizes labor productivity differences as the basis for comparative advantage.
- The model assumes that the cost of a product depends on the amount of labor required to produce it.
- A country's relative efficiency in producing different goods is key to trade.
Opportunity Cost Calculation Example
- Find the opportunity cost (e.g., cheese per liter of wine) by dividing the amount of time required to make one good by the amount of time needed to produce the other good.
Similarities Between Smith and Ricardo Models
- Both support specialization and trade for increased efficiency and overall welfare.
- Both assume free trade.
- Both note that different production capabilities (abilities) drive trade.
Ricardo's Trade Theory Reasoning
- Trade occurs because of differences in relative productivity, not due to absolute advantages or consumer preferences.
Shortcomings of Classical Trade Theories
- The assumptions behind these models (e.g., perfect competition) are not realistic in real-world economies.
- These models largely ignore transportation costs, economies of scale, technology transfers, capital mobility, and protectionist policies.
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Description
This quiz delves into the concepts of absolute and comparative advantage in economics, highlighting the significance of opportunity cost and trade. It explores Adam Smith's introduction of absolute advantage and Ricardo's comparative advantage theory, with calculations that illustrate these principles in real-world contexts.
