Deck 2: Why Countries Trade

Question 1

If the U.S. exports machines and India exports cloth, which of the following statements would be "false" ?

A) India can consume more with trade.
B) The U.S. can consume more with trade.
C) World production of machines and cloth will rise.
D) India would be worse off because they would consume less.

Answer 1

India would be worse off because they would consume less.

Question 2

Which of the following is a viable world price for one scooter?

A) 0.8PF
B) 2.2PF
C) 0.3PF
D) 8.5PF

Answer 2

0.3PF

Question 3

Suppose that the U.S. imports cloth from India. Describe what will happen to the price and quantity produced of cloth in both countries.

Answer 3

The results of the U.S. importing cloth from India can be seen in the graph below. In the U.S. the price of cloth will decline from P₁ as the supply of domestic cloth is augmented by imports from India. In India, the price of cloth increases from P₂ as some of the domestic production of cloth is exported to the U.S. The consumption of cloth will rise in the U.S. to point B and fall in India to point C. As the price of cloth falls in the U.S., domestic production will fall to point A and be replaced by imports from India. In India, the production of cloth will rise to point D as the price of cloth rises.

Question 4

What do football games and rats have to do with economic theory?

Question 5

Show how a country could have an absolute disadvantage in the production of a product relative to another country and still have a comparative advantage in the production of the product.

Question 6

Explain how trade will tend to emerge along the lines of comparative advantage.

Question 7

List and explain the various dynamic gains from trade.