Question 1

The terms of trade is given by:&#10;A) the prices paid for all imports.&#10;B) the prices received for all exports.&#10;C) the price paid for all domestically produced goods.&#10;D) the prices received for exports and paid for imports.

Accepted Answer

The terms of trade refer to the ratio between the prices of exports and imports. It essentially measures the amount of import goods an economy can purchase per unit of export goods.

Question 2

A deterioration of a country's terms of trade causes that country's welfare to:&#10;A) improve.&#10;B) deteriorate.&#10;C) remain unchanged.&#10;D) Any of the above can occur.

Accepted Answer

Any of the above can occur.&#10;

Question 3

The slope of a country's production possibilities frontier is called:&#10;A) the marginal rate of expansion.&#10;B) the marginal rate of substitution.&#10;C) the marginal rate of transformation.&#10;D) the marginal benefits of trade.

Accepted Answer

The slope of a country's production possibilities frontier is called the marginal rate of transformation, which measures the rate at which one good must be sacrificed in order to produce an additional unit of another good.

Question 4

International trade guarantees that countries that engage in trade all benefit by exactly the same amount. Is this statement true or false? Explain your answer.

Accepted Answer

The gains from trade are distributed between countries based on the terms of trade. The reciprocal demand theory indicates that the final terms of trade depends on the relative strength of each country's demand for the other country's product. The country with the greater demand for the other country's product will be willing to sacrifice more of its goods in exchange for that product. The resulting exchange ratio will distribute more of the gains from trade to the country whose good has greater demand relative to the demand of the other country. In addition, if the two countries are of unequal size (population or income), it is possible that the larger country's demand would be greater than the smaller country's demand. When this happens the smaller country gains more from trade than the larger country.

Question 5

Suppose that a country can convert wheat into textiles at a ratio of 3W = 1T. If the country could trade at 2.9W = 1T, it would be better off not trading. Explain why this statement is true or false.

Accepted Answer

The country can gain 0.1 wheat for every 1 textile it trades with the foreign country.

Question 6

What is the commodity terms of trade? Why is it sometimes used as a measure of changes in the gains from trade? Explain some of the problems associated with this sort of use.

Accepted Answer

The answer of What is the commodity terms of trade?...

Deck 3: Comparative Advantage and the Production Possibilities Frontier