Macroeconomics: Trade and Economic Growth
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Questions and Answers

What defines internal economies of scale?

  • Collaborative efficiencies obtained from industry-wide practices.
  • Efficiency improvements within a single firm. (correct)
  • Increased production due to market competition.
  • Reduction in costs due to external supplier relationships.

    • Which of the following is a characteristic of international economies of scale?

  • Dependence solely on domestic markets.
  • Integration of manufacturing operations globally. (correct)
  • Uniform production standards across different countries.
  • Restriction to local production facilities.

    • How does product differentiation affect economies of scale?

  • It increases unit costs but enhances variety for consumers. (correct)
  • It leads to the use of conventional machinery for all products.
  • It eliminates the need for specialized production techniques.
  • It allows for lower unit costs by standardizing production.

    • What factor is not considered an external economy of scale?

    <p>Increased output from a single firm.</p> Signup and view all the answers

    What does the concept of minimum efficient scale refer to?

    <p>The smallest quantity of output at which average costs are minimized.</p> Signup and view all the answers

    Which statement accurately represents natural economies of scale?

    <p>They result from location-specific advantages.</p> Signup and view all the answers

    What is the consequence of indifference curves crossing?

    <p>It suggests inconsistent utility levels among bundles.</p> Signup and view all the answers

    What describes the marginal rate of substitution (MRS)?

    <p>The rate at which one good is substituted for another without changing satisfaction.</p> Signup and view all the answers

    Why does the marginal rate of substitution decline as one moves down an indifference curve?

    <p>Due to the diminishing marginal utility of goods.</p> Signup and view all the answers

    What does opportunity cost refer to in economic terms?

    <p>The value of the next best alternative that is sacrificed.</p> Signup and view all the answers

    What is true about the production possibilities frontier (PPF) when a country is in autarky?

    <p>Production will be equal to consumption at a point on the PPF.</p> Signup and view all the answers

    What effect does the convexity property of preference ordering have on indifference curves?

    <p>It causes the curves to become less steep.</p> Signup and view all the answers

    What happens when moving to the right along an indifference curve?

    <p>A smaller amount of the good measured on the vertical axis is traded for the good on the horizontal axis.</p> Signup and view all the answers

    Which of the following statements about absolute advantage is correct?

    <p>It refers to the ability of a country to produce goods at a lower cost than others.</p> Signup and view all the answers

    What is indicated by the absolute value of the slope of an indifference curve?

    <p>The rate at which one good can be substituted for another while maintaining utility.</p> Signup and view all the answers

    What can be inferred if both countries have full employment?

    <p>All available resources are being used efficiently.</p> Signup and view all the answers

    What does the slope of the PPF represent?

    <p>The opportunity cost of producing one good over another.</p> Signup and view all the answers

    How is an implicit cost defined in the context of opportunity cost?

    <p>As the value of resources not directly accounted for in market transactions.</p> Signup and view all the answers

    In terms of trade-offs, what does the production possibility frontier (PPF) illustrate?

    <p>The opportunity costs involved in reallocating resources between different goods.</p> Signup and view all the answers

    Which condition must hold true for a country to benefit from trade according to comparative advantage?

    <p>It can produce a product at a lower opportunity cost than another country.</p> Signup and view all the answers

    When is production said to be efficient according to the PPF?

    <p>When any point on the PPF is reached.</p> Signup and view all the answers

    If a consumer has a very high quantity of a good, how would this impact their willingness to exchange it for another good?

    <p>They will become more willing to give it up.</p> Signup and view all the answers

    What is the role of transport costs in trade as per the provided assumptions?

    <p>There are no transport costs affecting trade.</p> Signup and view all the answers

    What does the international terms of trade line (TT') represent?

    <p>The relative prices at which countries trade with each other.</p> Signup and view all the answers

    Which statement concerning the economic outcomes of trade is true?

    <p>Countries trade to enhance real income beyond autarky levels.</p> Signup and view all the answers

    How is the pre-trade equilibrium marked on the graph?

    <p>At point e where the budget line and indifference curve intersect.</p> Signup and view all the answers

    What is the primary belief of Smith regarding economic progress?

    <p>Free trade without restrictions leads to social harmony and economic progress.</p> Signup and view all the answers

    According to David Ricardo's theory, if country A has an absolute advantage in producing both goods, what should it do?

    <p>Only produce the good in which it has the highest absolute advantage.</p> Signup and view all the answers

    What does Ricardo's theory imply about international trade?

    <p>All countries can benefit from specializing in their most efficient production.</p> Signup and view all the answers

    What assumption is NOT part of David Ricardo's theory of Comparative Advantage?

    <p>Countries have no restrictions on capital movement globally.</p> Signup and view all the answers

    What does 'ceteris paribus' imply in the context of Ricardo's theory?

    <p>All variables must remain constant except for those being studied.</p> Signup and view all the answers

    What type of trade pattern is primarily represented by Ricardo’s theory?

    <p>Inter-industry trade.</p> Signup and view all the answers

    How can Africa best benefit from Ricardo’s theory of Comparative Advantage?

    <p>By identifying and enhancing efficiency in production processes.</p> Signup and view all the answers

    Which of the following describes a misconception about international trade based on Ricardo's view?

    <p>Only countries with the same resources benefit from trade.</p> Signup and view all the answers

    What role does competition play in Ricardo's theory of Comparative Advantage?

    <p>It ensures that trade leads to maximum efficiency.</p> Signup and view all the answers

    Why does Ricardo advocate for free trade among nations?

    <p>To ensure that all trading nations can experience mutual gains.</p> Signup and view all the answers

    What happens to the supply curve when weather positively impacts the production of a good?

    <p>It shifts rightward.</p> Signup and view all the answers

    Which component is NOT part of the Keynesian equation representing Real GDP?

    <p>Capital gains (CG)</p> Signup and view all the answers

    What characterizes a trade surplus in the context of net exports?

    <p>Exports exceed imports.</p> Signup and view all the answers

    How does international trade impact investment decisions according to economic uncertainties?

    <p>It can halt investment due to uncertainties.</p> Signup and view all the answers

    What percentage of South Africa's GDP is generated from net exports?

    <p>40%</p> Signup and view all the answers

    What effect do global economic growth and government policies have on merchandise trade expansion?

    <p>They support sustained trade growth.</p> Signup and view all the answers

    Which of these reflects the expected growth rate of world merchandise trade volume for 2018?

    <p>4.4%</p> Signup and view all the answers

    What factor generally leads individuals to delay their investments regarding international trade?

    <p>Uncertainty about trading partners' actions.</p> Signup and view all the answers

    Which macroeconomic component does NOT directly reflect the influence of trade balance?

    <p>Personal savings (PS)</p> Signup and view all the answers

    Study Notes

    Economic Growth and Trade

    • Economic growth is indicated by an increase in real GDP.
    • The Keynesian equation determines real GDP through: Real GDP = AD = Y = C + I + G + (EX - IM).
    • Net exports (EX - IM) represent international trade, contributing approximately 40% to South Africa’s GDP.
    • Positive net exports indicate a trade surplus, while negative indicate a trade deficit.
    • Trade and investment are interconnected; uncertainties can affect investment decisions influenced by global events and policies.

    Global Trade Prospects

    • World merchandise trade growth is expected to be strong, projected at 4.4% in 2018.
    • Growth relies on robust global economic conditions and effective governmental policies.
    • Developing economies are anticipated to grow both in exports (5.4%) and imports (4.8%).

    Indifference Curves and Consumer Preferences

    • Indifference curves represent combinations of goods providing equal utility.
    • Curves do not cross, as each curve indicates a different level of satisfaction.
    • The marginal rate of substitution (MRS) shows how many units of one good a consumer is willing to trade for another, without changing overall satisfaction.
    • MRS demonstrates diminishing returns, as willingness to trade decreases with increased availability of a good.

    Opportunity Cost

    • Implicit costs, or opportunity costs, involve sacrifices made for a particular activity.
    • Choices made involve trade-offs, impacting resource allocation on the production possibilities frontier (PPF).
    • Adam Smith advocated for free trade and minimal government intervention to boost industry and social harmony.

    David Ricardo’s Theory of Comparative Advantage

    • Comparative Advantage posits that countries should produce goods best suited to their resources and capabilities.
    • Gains from trade occur even if one country has an absolute advantage in production.
    • The theory encourages inter-industry trade, emphasizing efficiencies in production processes.
    • Key assumptions of Ricardian theory include:
      • Two countries and two commodities.
      • Perfect competition and full employment.
      • Mobility of labor domestically but not internationally.
      • No transport costs or technological changes.

    Economies of Scale

    • Economies of scale arise from increased production, leading to lower per-unit costs.
    • Can be derived from:
      • Internal factors related to a single firm.
      • External factors impacting groups of firms within industries.
    • International economies of scale emerge through global manufacturing efficiencies and specialization in specific components.
    • Comparative advantage is enhanced through economies of scale, facilitating efficient production and trade patterns.

    Product Differentiation

    • Differentiated products increase unit costs but offer consumers greater choices due to specialization facilitated by international trade.
    • Firms can focus on producing specific varieties, enhancing variety available to domestic consumers.

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    International Trade Notes PDF

    Description

    This quiz explores the role of trade in generating economic growth through the lens of the Keynesian equation. Participants will analyze how beneficial weather affects supply and its impact on real GDP. Test your understanding of these macroeconomic concepts!

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