The British economist David Ricardo showed that free trade can benefit every trading partner, even one that is less efficient at producing everything.
Missing Word
Ricardo
David Ricardo, writing in the early nineteenth century, developed the theory of comparative advantage. He showed that gains from trade depend on differences in opportunity cost, not on which country is more productive overall.
Category: Comparative Advantage
Question 2
When a country concentrates its resources on producing the goods it makes at the lowest opportunity cost, it is practicing specialization.
Missing Word
specialization
Specialization means focusing production on a narrow range of goods. Specializing according to comparative advantage raises total output, which trade then lets countries share.
Category: Gains From Trade
Question 3
Goods and services that a country buys from producers in other countries are its imports.
Missing Word
imports
Imports are purchases of foreign-made goods and services. Through trade, a country imports goods that other countries can produce at a lower opportunity cost.
Category: Gains From Trade
Question 4
Goods produced domestically and shipped to foreign buyers are counted as a nation's exports.
Missing Word
exports
Exports are domestically produced goods and services sold abroad. A country tends to export the goods in which it has a comparative advantage.
Category: Gains From Trade
Question 5
The amount of output a worker produces in an hour of work is that worker's productivity.
Missing Word
productivity
Productivity measures output per unit of input, here per hour of labor. Specialization and trade raise productivity, which is a main reason trade expands what an economy can produce.
Category: Economies of Scale
Question 6
On a straight-line production possibilities frontier, the opportunity cost of the good on the horizontal axis equals the absolute value of the frontier's slope.
Missing Word
slope
The slope shows how much of the vertical-axis good must be given up for one more unit of the horizontal-axis good. A straight frontier has a constant slope, so the opportunity cost stays the same at every point.
Category: Opportunity Cost
Question 7
Without trade, a small economy may be able to support only a single firm in an industry with large economies of scale, a market structure called a monopoly.
Missing Word
monopoly
A monopoly is a market with only one seller, which faces no rivals to hold its price down. Opening to trade lets foreign firms sell in the small market, so buyers gain both low-cost production from large plants and a choice among competing sellers.
Category: Economies of Scale
Question 8
A gain from trade occurs when a country's consumption of goods exceeds what it could produce using only its own resources.
Missing Word
consumption
Consumption is the use of goods and services by households. By specializing and trading, a country can consume a combination of goods that lies outside its own production possibilities frontier.
Category: Gains From Trade
Question 9
The round of World Trade Organization negotiations launched in Qatar in November 2001 is known as the Doha Round.
Missing Word
Doha
The Doha Round is named for the capital of Qatar, where it began in 2001. It focused on lowering trade barriers, including reform of agricultural subsidies.
Category: Benefits of Open Trade
Question 10
In the simplest model of comparative advantage, the only resource used in production is labor, so costs are counted in worker hours.
Missing Word
labor
Labor is human work effort used in production. Counting costs in hours of work keeps the model simple while still showing how opportunity cost determines the pattern of trade.
Category: Opportunity Cost
Question 11
Firms that specialize narrowly often cut their costs through innovation, the development of new products and better methods of production.
Missing Word
innovation
Innovation is the creation and adoption of new products and processes. Specialization encourages it, because firms focused on one product build knowledge that leads to improvements.
Category: Economies of Scale
Question 12
The process by which national economies become ever more closely linked through trade in goods, services and investment is called globalization.
Missing Word
globalization
Globalization describes the rising economic ties among countries. Falling transportation and communication costs and lower trade barriers have both driven it.
Category: Benefits of Open Trade
Question 13
In a model of two countries and two goods with differing opportunity costs, each country has a comparative advantage in exactly 1 of the goods.
Missing Word
1
If one country has the lower opportunity cost of the first good, the other country must have the lower opportunity cost of the second good. So each country holds the comparative advantage in a single good.
Category: Comparative Advantage
Question 14
In a split value chain, the final stage, in which parts made in many places are put together into the finished product, is called assembly.
Missing Word
assembly
Assembly is the stage of production that joins components into a finished good. Firms often place assembly in a different country from design or parts making, based on where each stage costs least.
Category: Intra-Industry Trade
Question 15
When costs are counted in worker hours, the opportunity cost of one bicycle, measured in jackets, is the ratio of the hours needed to make a bicycle to the hours needed to make a jacket.
Missing Word
ratio
A ratio compares two quantities by dividing one by the other. If a bicycle takes 10 hours and a jacket takes 5 hours, the hours freed by not making one bicycle could make 10 / 5 = 2 jackets, so one bicycle costs 2 jackets.
Category: Opportunity Cost