Study Guide, Chap 2.

International Economics

1. _______________________ _____________________ determines which goods are exported and which are imported, and defines the limits to mutually beneficial trade.



2. Within the limits to mutually beneficial trade, the actual exchange ratio (terms of trade) is determined by the _____________________ of each country's ______________ for the other country's product.



3. Trade leads to complete specialization in the Ricardian example due to the assumption that __________________________________________________________________ as output expands or contracts. The existence of one_________________________

factor of ________________, which is ____________ gives rise to these _________________ cost conditions.

1. Limits to a sustainable exchange rate are determined by a country's ________ _______.



2. Relative wages and, hence, living standards of countries are determined by ____________

________________.

1. Trade raises real income of a community by encouraging a more _____________ _______________ of _______________ _______________ across sectors.



2. List two dynamic benefits of trade.



3. Refer to footnote 4, chapter 2 in your text to answer these questions:

a. In what sense are the cost data (as per above) of footnote 4 related to the figures of Scheme 1 in your text?

b. Based on the figures of footnote 4, determine the:

What are the opportunity (resource) costs for each commodity in both countries?

Direction of trade once it develops

Limits to mutually beneficial trade in terms of (i t o) 1 yard Textiles

Limits to a sustainable exchange rate

1. Evaluate the following statements:



2. In international trade, domestic cost ratios determine the limits of mutually beneficial trade, whereas demand considerations show where, within these limits, the actual exchange ratio will lie.

• Comparative advantage is a theoretical concept. It cannot be used to explain any real-world phenomena.

























• The opening up of trade raises the price of export goods, hence trade is inflationary.



















• Using the figures of Scheme 1, chapter two in the text, determine the limits to the U.K.-U.S. wage ratio.















• What can you say about the following relationships? (If no relationship exists, explain why).

A. Absolute advantage and the relative standard of living.

B. Absolute advantage and the direction of international trade.

C. Comparative advantage and the direction of trade

D. Comparative advantage and the relative standard of living.

1. Suppose that between 1960 and 1980 U.S. steel industry wage rates tripled while general manufacturing wage rates doubled, and that productivity in the steel industry advanced equally with that in all manufacturing. Also suppose that in Japan during the same period, both wage rates and productivity in the steel industry rose in tandem with that of all manufacturing. Discuss what happened to U.S. comparative advantage in steel over this period.



















2. According to the data in Table 2-3, discuss the U.S. comparative advantage in all three industries listed relative to Germany and Japan.





























3. When production costs are constant, as in the Classical Ricardian model, the production possibilities curve is ________________________________.