Questions and Answers
Country A has an absolute advantage for producing which fruit?
In a two-good market, a country can only have an absolute advantage in one good.
False
The concept illustrated by Country A specializing in kiwis and Country B specializing in oranges is called what?
the gains of trade
What does comparative advantage consider regarding production costs?
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What occurs when both Country A and Country B increase their production of strawberries and kiwis respectively?
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How can a nation achieve trade benefits using opportunity cost?
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In intra-industry trading, firms can often control the entire value chain for their product.
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What relationship exists between economies of scale and intra-industry trade?
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Tariffs decrease the price of imported goods, which increases demand.
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What is a benefit of reducing barriers to international trade?
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Study Notes
Absolute Advantage
- Country A has an absolute advantage in strawberry production due to favorable climate and a large, knowledgeable labor force, producing 80,000 baskets.
- Country B, with shorter summers and less trained agricultural workers, produces only 30,000 baskets of strawberries.
Trade Basics
- A myth in trade is that a country can only have an absolute advantage in one good; this is not true.
- Specialization enhances consumption; countries can consume more goods through trade than through self-sufficiency, exemplified by Countries A and B trading kiwis and oranges.
Comparative Advantage
- Comparative advantage focuses on opportunity costs in production, answering "What are the trade-offs of producing this good?"
- Mutual benefits in trade arise when each country specializes in goods where they have a comparative advantage, allowing for increased production and consumption.
Opportunity Cost in Trade
- Nations achieve trade benefits by focusing on goods with the lowest opportunity cost and trading for goods where they lack comparative advantage.
Intra-Industry Trade
- Intra-industry trading allows firms to manage entire value chains, but it is false that this is always the case.
- Intra-industry trade fosters competition and diversity in markets, counteracting tendencies for fewer firms and products caused by economies of scale.
Tariffs and Trade Barriers
- Tariffs increase import prices, leading to decreased demand for imported goods.
- Lowering international trade barriers promotes specialization, which enhances worker productivity and overall economic efficiency.
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Description
Test your understanding of microeconomic concepts discussed in Chapter 19. This quiz covers topics like resource allocation and comparative advantage using examples from different countries' agricultural capabilities. Challenge yourself with flashcards on key concepts!
