ECN 306 chpt 1

mercantilists

argued that a nation could only gain at the expense of other nations

Smith

maintained that all nations simultaneously can enjoy gains from trade in terms of production and consumption.

True

absolute cost advantage

uses less labor to produce a unit of output

absolute cost disadvantage

A nation will import goods export those goods in which it has an absolute cost advantage.

absolute cost advantage.

a nation will export those goods

Ricardo

a principle to show that mutually beneficial trade can occur whether or not countries have an absolute advantage. comparative advantage

comparative advantage

even if a nation has an absolute cost disadvantage in the production of both goods, a basis for mutually beneficial trade may still exist.

comparative advantge (how do nations specialize/export)

The less efficient nation should specialize in and export the good that is relatively less inefficient (where its absolute disadvantage is least). The more efficient nation should specialize in and export that good that is relatively more efficient (where its absolute advantage is greatest).

A Production Possibilities Frontier curve (PPF)

illustrates the concept of comparative cost by showing the amount of one product a nation must sacrifice to get one additional unit of another product.

constant opportunity costs

The opportunity cost of an additional unit of a product, in terms of the lost output of another product, is unchanged as more of the product is produced.

increasing-cost conditions PPF

the slope of a bowed-out production possibilities curve, indicates the marginal rate of transformation, varies at each point along the curve.

constant-cost conditions PPF

the production possibilities curve is a straight line, the marginal rate of transformation does not change in response to movements along the production possibilities curve

constant opportunity cost, specialization is…

complete; because a country can devote all of its resources to the production of a good without losing its comparative advantage

A trade triangle

an area in a country’s production possibilities diagram that displays the country’s expanded consumption possibilities that result from trade. ndicates a country’s exports, imports, and equilibrium terms of trade

A trade triangle is bounded

on the right by the trading possibilities line given by the terms of trade and on the two remaining sides by the country’s imports and exports