Eco quiz #6a (Modules 15,16) (Week 7)
The market for corn in Wheatland consists solely of domestic buyers of corn and domestic sellers of corn if
Wheatland forbids international trade in corn.
What is the fundamental basis for trade among nations?
comparative advantage
The principle of comparative advantage asserts that
countries can become better off by specializing in what they do best.
For any country, if the world price of zinc is higher than the domestic price of zinc without trade, that country should
export zinc, since that country has a comparative advantage in zinc.
If the world price of textiles is higher than Vietnam's domestic price of textiles without trade, then Vietnam
has a comparative advantage in textiles.
A country has a comparative advantage in a product if the world price is
higher than that country's domestic price without trade.
The nation of Falconia forbids international trade. In Falconia, you can obtain a computer by trading 3 bicycles. In other countries, you can obtain a computer by trading 5 bicycles. These facts indicate that
if Falconia were to allow trade, it would export computers.
The nation of Pineland forbids international trade. In Pineland, you can buy 1 pound of fish for 2 pounds of pineapples. In other countries, you can buy 1 pound of fish for 1.5 pounds of pineapples. These facts indicate that
if Pineland were to allow trade, it would import fish.
Assume, for Singapore, that the domestic price of soybeans without international trade is higher than the world price of soybeans. This suggests that, in the production of soybeans,
other countries have a comparative advantage over Singapore and Singapore will import soybeans.
Assume, for the U.S., that the domestic price of wheat without international trade is higher than the world price of wheat. This suggests that, in the production of wheat,
other countries have a comparative advantage over the U.S. and the U.S. will import wheat.
A tax on an imported good is called a
tariff.
A tariff is a
tax on an imported good.
If a country allows trade and, for a certain good, the domestic price without trade is lower than the world price,
the country will be an exporter of the good.
If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price,
the country will be an importer of the good.
A logical starting point from which the study of international trade begins is
the principle of comparative advantage.
If a country is an exporter of a good, then it must be the case that
the world price is greater than its domestic price.
Suppose Guatemala has an absolute advantage over other countries in producing sugar, but other countries have a comparative advantage over Guatemala in producing sugar. If trade in sugar is allowed, Guatemala
will import sugar.
The price of a good that prevails in a world market is called the
world price.
