International Trade

absolute advantage

• when one country can use fewer resources to produce a good compared to another country; when a country is more productive compared to another country

  • ex: Saudi Arabia and oil, Guatemala and Columbia with coffee, Chile and Zambia with copper

comparative advantage

when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production

specialization

when workers or firms or countries focus on particular tasks for which they are well‐suited within the overall production process ‐> increase in total world production

intra-industry change

trade of goods within the same industry from one country to another

A

What does absolute advantage mean in trade?
A) When one country can produce a good using fewer resources than another
B) When one country can produce more goods overall
C) When countries benefit equally from trade
D) When a country only imports high-demand goods

B

Comparative advantage occurs when a country:
A) Has more resources than its trading partner
B) Can produce a good at a lower opportunity cost than another country
C) Produces all goods more efficiently than its partner
D) Has a trade surplus in all sectors

c

According to the theory of comparative advantage, countries should:
A) Import goods with higher prices
B) Avoid trading similar goods
C) Specialize in what they produce at the lowest opportunity cost
D) Only trade with high-income countries

D

What happens when two countries specialize in their comparative advantages and trade?
A) One country benefits more than the other
B) Total world production remains the same
C) Both countries end up with fewer goods
D) Both countries can consume more than they would without trade

A

Intra-industry trade is trade:
A) Between countries exchanging similar kinds of goods within the same industry
B) That only happens between low-income nations
C) That only benefits one country
D) Focused solely on agriculture

C

Why do similar high-income countries engage in intra-industry trade?
A) To avoid tariffs
B) To support developing countries
C) Because of economies of scale and consumer variety
D) Because of trade restrictions

B

Economies of scale refer to:
A) Increasing prices as production increases
B) Decreasing average costs as production increases
C) Keeping prices constant regardless of output
D) Limiting production to reduce costs

A

Dynamic comparative advantage means:
A) A country’s comparative advantage can change over time
B) All countries will eventually have the same strengths
C) Opportunity cost remains constant
D) Countries must stick to one industry forever

D

What is a tariff?
A) A payment made to exporters
B) A free trade agreement
C) A subsidy for domestic production
D) A tax on imported goods

A

One reason countries impose tariffs is to:
A) Protect domestic industries from foreign competition
B) Encourage currency depreciation
C) Reduce income inequality
D) Reward trade partners

B

According to the World Bank, reducing trade barriers could:
A) Lower productivity in all countries
B) Increase the size of the world economy by billions annually
C) Have no real impact on global output
D) Only benefit high-income countries

D

The iPhone example in the notes illustrates:
A) One country producing the entire product
B) Only high-income countries contributing to manufacturing
C) Tariff barriers in electronics
D) Comparative advantage and global value chains