Questions and Answers
Define international trade.
International trade is the exchange of goods and services between countries, creating a world economy with its own supply and demand.
Define autarky.
An autarky is an economy that does not trade and is economically independent or self-sufficient.
What are the gains from international trade? (Select all that apply)
How does international trade lead to lower prices?
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How does international trade lead to greater choice?
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How does international trade lead to differences in resources?
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How does international trade lead to economies of scale?
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How does international trade lead to increased competition?
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How does international trade lead to more efficient allocation of resources?
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How is international trade a source of foreign exchange?
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Define absolute advantage.
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Define reciprocal absolute advantage.
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Who came up with the comparative advantage theory and when?
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Define comparative advantage.
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What happens if there is no comparative advantage?
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What gives a country a comparative advantage?
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Study Notes
International Trade
- International trade involves the exchange of goods and services across countries, creating a global economy defined by its supply and demand dynamics.
Autarky
- An autarky refers to an economy that operates independently without engaging in international trade, achieving self-sufficiency.
Gains from International Trade
- Lower prices enable consumers and producers to purchase goods and raw materials more affordably.
- Greater choice provides consumers with a wider variety of products, including those from diverse countries.
- Differences in resources necessitate imports for countries lacking certain raw materials essential for production.
- Economies of scale arise as firms increase production to meet both national and international demand, reducing per-unit costs.
- Increased competition from foreign firms enhances local market efficiency, quality, and variety of goods and services.
- More efficient allocation of resources occurs when countries specialize in producing goods they can produce at lower costs, thus optimizing global resource use.
- International trade acts as a source of foreign exchange, allowing countries to acquire foreign currencies vital for purchasing essential imports, particularly for developing nations.
Absolute and Comparative Advantage
- Absolute advantage exists when a country can produce a good more efficiently than another, using fewer resources.
- Reciprocal absolute advantage occurs when two countries each hold an absolute advantage in producing different goods.
- David Ricardo established the theory of comparative advantage in the early 19th century, demonstrating that trade benefits both countries even if one country has absolute advantages in all goods.
- Comparative advantage is defined by a country's ability to produce a good at a lower opportunity cost compared to others.
Implications of Comparative Advantage
- Without comparative advantage, countries gain no benefits from trading, emphasizing the importance of this concept in international economics.
- A country’s comparative advantage is largely influenced by its economic endowments, such as resources and labor, which can lower production costs for certain goods. For instance, ample arable land boosts agricultural production advantages.
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Test your knowledge on international trade with these flashcards. Learn definitions, concepts like autarky, and the benefits of trading between countries. Ideal for students studying economics or global trade.