Economics: Closed Economy and Trade Effects
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Questions and Answers

What represents a country's preferences for combinations of two different goods?

  • Production Possibility Frontier
  • Closed Economy
  • Comparative Advantage
  • Indifference Curve (correct)

    • A closed economy can engage in international trade.

    False

    What is the point of domestic equilibrium referred to in the context of the PPF and IC?

    Point E

    Comparative advantage is the ability to produce a good at a lower __________ cost than another country.

    <p>opportunity</p> Signup and view all the answers

    Match the concepts with their definitions:

    <p>Comparative Advantage = Ability to produce a good at a lower opportunity cost Closed Economy = An economy that does not engage in international trade Gains from Trade = Additional consumption possibilities from trading Point G = A new consumption point beyond the PPF</p> Signup and view all the answers

    What happens when a country opens to trade?

    <p>It can specialize in producing goods with comparative advantage.</p> Signup and view all the answers

    The Production Possibility Frontier (PPF) shows the minimum combination of goods that a country can produce.

    <p>False</p> Signup and view all the answers

    What are the gains from trade?

    <p>Additional consumption possibilities.</p> Signup and view all the answers

    A country producing all goods it consumes is in a state of __________.

    <p>self-sufficiency</p> Signup and view all the answers

    What does autarky limit a country's economic growth to?

    <p>Internal resources and technology</p> Signup and view all the answers

    In autarky, consumption can exceed production.

    <p>False</p> Signup and view all the answers

    What is represented by the Production Possibility Frontier (PPF)?

    <p>Maximum combination of two goods produced with available resources.</p> Signup and view all the answers

    In autarky, points beyond the PPF are considered _______.

    <p>unattainable</p> Signup and view all the answers

    Match the following concepts with their definitions:

    <p>Indifference Curve = Represents combinations of goods providing equal satisfaction Utility = Total satisfaction from consuming goods or services Efficiency at Tangency = Occurs where PPF intersects the price line Higher Indifference Curve = Indicates greater levels of utility or satisfaction</p> Signup and view all the answers

    What is the goal of consumers in relation to indifference curves?

    <p>To maximize utility</p> Signup and view all the answers

    Higher indifference curves correspond to lower levels of utility.

    <p>False</p> Signup and view all the answers

    What represents the trade-off between two goods in autarky?

    <p>The price line or price ratio</p> Signup and view all the answers

    The most efficient point in autarky is found where there is a tangency between the PPF and the _______.

    <p>price line</p> Signup and view all the answers

    What characterizes the consumption in autarky?

    <p>Consumption is equal to production</p> Signup and view all the answers

    What defines absolute advantage in the production of a good?

    <p>Ability to produce a good more efficiently than any other country</p> Signup and view all the answers

    A country can achieve mutual benefits from trade even if it has no absolute advantage in any goods.

    <p>True</p> Signup and view all the answers

    What is the key factor that leads to specialization according to Ricardo's theory?

    <p>Comparative advantage</p> Signup and view all the answers

    A country has a comparative advantage in a good if it can produce it at a lower ________ cost than another country.

    <p>opportunity</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Absolute Advantage = Producing more efficiently than any other country Comparative Advantage = Producing at a lower opportunity cost than another country Specialization = Concentrating on the production of goods where efficiency is higher Trade = Exchange of goods and services between countries</p> Signup and view all the answers

    Which of the following is NOT a benefit of trade according to Ricardo's theory?

    <p>Higher unemployment rates</p> Signup and view all the answers

    Technological differences are a key factor behind comparative advantage.

    <p>True</p> Signup and view all the answers

    How does specialization increase overall production efficiency?

    <p>By allowing countries to focus on producing goods where they have a comparative advantage.</p> Signup and view all the answers

    According to Ricardo's theory, specialization leads to a ________ range of products and services available for trade.

    <p>wider</p> Signup and view all the answers

    Which concept did Ricardo's Comparative Advantage Theory revolutionize in economics?

    <p>The way economists think about international trade</p> Signup and view all the answers

    What happens during the growth stage of a product's life cycle?

    <p>The product's popularity increases and prices start to fall.</p> Signup and view all the answers

    The introduction stage is considered less risky for innovating companies than the decline stage.

    <p>False</p> Signup and view all the answers

    What factor often provides the innovating country with a comparative advantage in producing a new product?

    <p>Research and Development (R&amp;D)</p> Signup and view all the answers

    During the _____ stage, competition is high and prices are stable.

    <p>maturity</p> Signup and view all the answers

    Match the following product life cycle stages with their main characteristics:

    <p>Introduction = High price, low demand Growth = Increasing popularity, falling prices Maturity = Stable prices, high competition Decline = Losing popularity, shrinking market</p> Signup and view all the answers

    Which country was the first to produce many of the world's popular products according to product life cycle theory?

    <p>United States</p> Signup and view all the answers

    What does Krugman's model suggest as a reason for trade between countries with identical preferences?

    <p>Extending markets and exploiting economies of scale</p> Signup and view all the answers

    Intra-industry trade is characterized by the exchange of goods across different industries.

    <p>False</p> Signup and view all the answers

    What is the only factor of production assumed in Krugman's model?

    <p>Labour</p> Signup and view all the answers

    Firms in monopolistically competitive markets can charge a price above ______.

    <p>marginal cost</p> Signup and view all the answers

    Match the following aspects of monopolistic competition with their characteristics:

    <p>Market Power = Firms can influence prices Product Differentiation = Distinguishing products by quality or branding Entry and Exit = New firms can enter if potential for profit exists Output Level = Firms produce more output than in perfect competition</p> Signup and view all the answers

    Which assumption is NOT part of Krugman's model?

    <p>Countries have different factor endowments</p> Signup and view all the answers

    According to Krugman's model, economies of scale occur when average costs increase as production quantity increases.

    <p>False</p> Signup and view all the answers

    What type of competition characterizes the markets described in Krugman's model?

    <p>Monopolistic competition</p> Signup and view all the answers

    The elasticity of demand in Krugman's model ______ as the price of a good increases.

    <p>rises</p> Signup and view all the answers

    What happens to profits in a monopolistically competitive market over time?

    <p>They are eventually driven down to zero</p> Signup and view all the answers

    Study Notes

    Intersection of CIC and PPF

    • The intersection demonstrates resource allocation and consumption possibilities for a country.

    Closed Economy Characteristics

    • A closed economy does not participate in international trade.
    • The Production Possibility Frontier (PPF) represents the maximum output of two goods using limited resources.
    • The Indifference Curve (IC) represents consumer preferences between clothing and food.
    • Domestic equilibrium occurs at the tangent point (E) of PPF and IC, indicating efficient resource allocation.

    Comparative Advantage and Opportunity Cost

    • Comparative advantage allows countries to produce goods at lower opportunity costs.
    • Opportunity cost refers to the value sacrificed of one good when producing another.
    • A closed economy operates at a point of self-sufficiency, producing all consumed goods.

    Effects of Opening to Trade

    • Trade enables specialization in goods where a country has a comparative advantage.
    • Specialization increases production efficiency, allowing for greater exports.
    • Countries can import other goods, enhancing consumption beyond domestic capabilities.

    Gains from Trade

    • Gains from trade result in expanded consumption possibilities represented graphically by movement from point E to point G, outside the PPF.
    • Countries can achieve higher consumption levels by specializing in comparative advantage goods.

    Absolute vs. Comparative Advantage

    • A country has an absolute advantage if it can produce a good more efficiently than others.
    • Comparative advantage exists if a country can produce a good at a lower relative cost than another.

    Mutually Beneficial Trade

    • Even if a country is less efficient overall, it can still benefit from trade by exploiting comparative advantages.
    • Specialization leads to increased production efficiency and a broader availability of goods.

    Technology and Relative Costs

    • Differences in technology and relative costs create comparative advantages, facilitating specialization.

    Benefits of Trade

    • Trade increases efficiency, expands production capabilities, and raises living standards for trading nations.
    • Countries experience a wider variety of products and services through specialization and trade.

    Impact of Ricardo's Theory

    • Ricardo's Comparative Advantage Theory transformed economic thought on international trade.
    • Especially relevant for policy formation, the theory emphasizes the benefits of specialization and exchange.

    Before Trade: Autarky Concepts

    • Economic growth in autarky is limited by domestic resources and technology.
    • Points beyond the PPF are unattainable without trade.
    • Consumption equals production in autarky, relying solely on internal resources.

    Efficiency in Autarky

    • Most efficient production occurs at the tangency of the PPF, price line, and highest utility-indifference curves.

    Indifference Curves and Utility

    • Indifference curves show combinations of goods providing equal satisfaction.
    • Higher curves indicate greater utility, and consumers aim for the highest possible utility given budget constraints.

    Identical Preferences and Krugman's Model

    • Krugman's model suggests that identical preferences, technology, and endowments lead to trade and increased market economies.
    • This model accounts for intra-industry trade, characterized by differentiation within industries.

    Assumptions of Krugman's Model

    • Shared utility functions, identical technology, only labor as a production factor, full employment, and variable elasticity of demand.
    • Internal economies of scale in monopolistic competition lead to differing product outputs.

    Economies of Scale and International Trade

    • Economies of scale reduce average production costs as output increases.
    • Market dynamics follow stages: growth, maturity, and decline, impacting prices and production patterns.

    Real-World Examples

    • The U.S. pioneered many innovations, but countries like China caught up in production efficiencies (e.g., smartphones).

    Criticisms of Product Life Cycle Theory

    • Simplicity fails to consider variables like labor costs and resource availability.
    • Assumes equal innovation capacity among all nations.

    Introduction Stage of Product Development

    • The innovating country introduces new products domestically, holding initial monopoly advantages.
    • High costs in R&D and production create risks; careful management is essential to achieve profitability.

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    Description

    This quiz covers the characteristics of a closed economy, the intersection of the Indifference Curve and Production Possibility Frontier, and the impact of trade on resource allocation. Test your understanding of comparative advantage, opportunity costs, and economic efficiency.

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