International Trade Concepts Quiz

The amount of one good that must be given up to produce one more unit of another good.

The ability of a country to produce a good at a lower opportunity cost than another country.

The opportunity cost of producing one unit of books in the UK is 0.25 units of textiles. To find this, divide the amount of textiles the UK can produce (1) by the amount of books it can produce (4).

The opportunity cost of producing one unit of books in India is 1.5 units of textiles. To find this, divide the amount of textiles India can produce (2) by the amount of books it can produce (3).

The UK has a comparative advantage in producing books because its opportunity cost of producing books (0.25 units of textiles) is lower than India's opportunity cost of producing books (1.5 units of textiles).

Specialization occurs when countries focus on producing the goods they have a comparative advantage in. In this case, the UK specializes in books and India specializes in textiles.

To find the opportunity cost of producing one unit of grain in Country X, divide the amount of oil it can produce (200 barrels) by the amount of grain it can produce (50 tons). This gives an opportunity cost of 4 barrels of oil per ton of grain.

To find the opportunity cost of producing one unit of grain in Country Y, divide the amount of oil it can produce (150 barrels) by the amount of grain it can produce (75 tons). This gives an opportunity cost of 2 barrels of oil per ton of grain.

The relative price of a good is the price of that good compared to the price of another good.

The relative supply curve shows the quantity of a good that producers are willing to supply at different relative prices.

The relative demand curve shows the quantity of a good that consumers are willing to buy at different relative prices.

The autarky relative price is the relative price of a good in a closed economy, where there is no international trade.

The free trade relative price is the relative price of a good in an open economy, where countries can trade with each other.

Specialization refers to a country focusing on producing the goods in which it has a comparative advantage.

The pattern of trade refers to which goods countries export and import.

The free trade relative price will lie between the two countries' autarky relative prices.

The idea that countries should specialize in producing goods and services where they have a comparative advantage and trade with other countries to obtain other goods and services they need. This leads to higher overall output and efficiency.

A situation where a country can produce a good or service more efficiently than another country. It means they use fewer resources to produce the same amount of output.

Pat Buchanan wrongly believed that the theory of comparative advantage dictates that less efficient countries should be given industries by more efficient countries. This misunderstands the core principle of comparative advantage, which focuses on opportunity costs and relative efficiencies.

The theory of comparative advantage is based on relative efficiencies and opportunity costs, not absolute efficiencies. Countries should specialize in producing goods where they have a lower opportunity cost, even if they are not the absolute most efficient producers. This leads to greater efficiency and overall output for both countries involved.

The theory of comparative advantage is an essential economic concept that explains why countries benefit from international trade, even if they have absolute advantages in certain goods. By focusing on their comparative advantages, countries can maximize their output and achieve higher welfare.

Different countries have different amounts of resources available, like land, labor, or capital.

The amount of a particular resource used in production of a good. For example, agriculture uses lots of land.

The theory that countries have a comparative advantage in producing goods that use their relatively abundant factors of production. E.g., a country with lots of land might specialize in agricultural goods.

The state of a country before international trade, where goods are produced and consumed locally.

A situation where countries trade freely with each other, leading to specialization and potentially higher overall welfare.

The benefits countries experience when they participate in international trade, leading to higher output and consumption levels.

The difference between a country's production and consumption, where a surplus is exported and a deficit is imported.

Goods that are mainly produced and exported by countries with abundant capital, like technology and machinery.

A country can specialize in producing what it does best and trade for things it's not good at, essentially increasing its production possibilities.

The idea that even if a country is less productive than another country overall, it can still benefit from trade by focusing on what it does relatively better.

The idea that trade can lead to job losses in some industries, but that these losses are outweighed by the gains in other industries and overall economic growth.

The idea that trade with low-wage countries is unfair to high-wage countries, but that trade benefits both by lowering prices and improving access to goods.

The idea that trade with low-wage countries exploits those countries, but that trade actually helps those countries by increasing their wages and standard of living.

The total demand for a good in a monopolistically competitive market depends on its own price, the prices charged by its rivals, and the total number of firms in the industry.

The demand function faced by a firm in monopolistic competition shows how its sales (Q) are determined by the total sales of the industry (S), the number of firms (n), the price it charges (P), the average price charged by its competitors (P), and a responsiveness coefficient (b).

Each firm's total cost (C) of production is represented by the sum of fixed costs (F) and variable costs (cxQ), where c is the firm's marginal cost and Q is its output.

In monopolistic competition, all firms face the same demand function and have the same cost function, leading them to charge the same price in equilibrium (P = P). The output of each firm is then determined by the total industry sales divided by the number of firms (Q = S/n).

Average cost (AC) for a firm in monopolistic competition is calculated as the total cost divided by the output (AC = C/Q). This cost is affected by fixed costs, the number of firms, and the total sales of the industry.

As the number of firms (n) in a monopolistically competitive market increases, the average cost (AC) for each firm increases because they produce less. Conversely, as the total sales (S) of the industry increase, each firm produces more, leading to a decrease in average cost.

In monopolistic competition, an increase in the number of firms leads to increased competition, resulting in a decrease in the price that each firm charges.