Midterm Exam for International Trade and Agreement

He said that comparative advantage as the best example he knows of an economic principle that is undeniably true yet not obvious to intelligent people

(a)  

Economists use the term (a)   to describe such trade-offs

Because any economy has (a)   , there are limits on what it can produce, and there are always trade-offs; to produce more of one good, the economy must sacrifice some production of another good.

In a (a)   economy, supply decisions are determined by the attempts of individuals to maximize their earnings.

(a)   is the simplest model that shows how differences between countries give rise to trade and gains from trade. In this model, labor is the only factor of production, and countries differ only in the productivity of labor in different industries.

In the Ricardian model, countries will export goods that their labor produces relatively efficiently and will import goods that their labor produces relatively inefficiently. In other words, a country’s production pattern is determined by (a)   .

We can show that trade benefits a country in either of two ways. First, we can think of trade as an (a)   method of production. Instead of producing a good for itself, a country can produce another good and trade it for the desired good.

The distribution of the gains from trade depends on the (a)   of the goods countries produce.

Extending the one-factor, two-good model to a world of many commodities does not alter these conclusions. The only difference is that it becomes necessary to focus directly on the (a)   for labor to determine relative wages rather than to work via relative demand for goods. Also, a many-commodity model can be used to illustrate the important point that transportation costs can give rise to a situation in which some goods are nontraded.

Which are the misconception about comparative advantage (myth)

• Free trade is beneficial only if your country is strong enough to stand up to foreign competition.

• Foreign competition is unfair and hurts other countries when it is based on low wages

• Trade exploits a country and makes it worse off if its workers receive much lower wages than workers in other nations. This argument is often expressed in emotional terms.

• none of the options