Chapter 2 & 8 - International Trade

ECON:1100 Final Exam

Export

a product sold from one country to another

Import

a product bought by one country from another

What is the principle of absolute advantage?

a country should export those goods in which it has an absolute cost advantage and import goods in which it has an absolute cost disadvantage

What is the theory of comparative advantage?

it makes sense to produce the thing you’re especially good at producing and buy everything else from others

When a country has comparative advantage?

in producing a good if its opportunity cost of producing the good or service is lower than for other countries

Trade line

it shows the range of consumption possibilities that a country can achieve by specializing in one good and engaging in international trade

What is the difference between comparative advantage and absolute advantage?

CA determines the pattern of trade among nations while AA determines national wage levels and the income in each country

Autarky

a situation in which a country does not trade with other countries

Tariff

a tax levied on imports

Specific tariff

stipulated as a money amount per unit of import

Ad valorem tariff

a percentage of the estimated market value of the imported good when it reaches the importing country

What are tariffs two effects?

1. increase in domestic production, reduction domestic consumption

2. less is consumed, leading to lower gains from trade

Import quota

legal limit on the quantity of a good that can be imported

Increasing returns to scale

productivity rises with the quantity of output