Chapter 2 IE

autarky

a case of national self-sufficiency or absence of trade

basis for trade

basis for trade why nations export and import certain products

commodity terms of trade

measures the relationship between the prices a nation gets for its exports and the prices it pays for its imports

community indifference curve

the indifference curve that represents the tastes and preferences of all of the households of a nation

complete specialization

a situation in which a country produces only one good

constant opportunity costs a constant rate of sacrifice of one good for another as a nation slides along its production possibilities schedule

a constant rate of sacrifice of one good for another as a nation slides along its production possibilities schedule

consumption gains

posttrade consumption points outside a nation’s production possibilities schedule

dynamic gains from international trade

the effect of trade on the country’s growth rate and thus on the volume of additional resources made available to, or utilized by, the trading country

exit barriers

cost conditions that make lengthy industry exit a rational response by companies

free trade

a system of open markets between countries in which nations concentrate their production on goods they can make most cheaply, with all the consequent benefits of the division of labor

gains from international trade

gains trading partners simultaneously enjoy due to specialization and the division of labor

importance of being unimportant

when one trading nation is significantly larger than the other, the larger nation attains fewer gains from trade while the smaller nation attains most of the gains from trade

increasing opportunity costs

when each additional unit of one good produced requires the sacrifice of increasing amounts of the other good

indifference curve

a curve depicting the various combinations of two commodities that are equally preferred in the eyes of the consumer

labor theory of value

the cost or price of a good depends exclusively on the amount of labor required to produce it

marginal rate of transformation (MRT)

the slope of the production possibilities schedule that shows the amount of one product a nation must sacrifice to get one additional unit of the other product

mercantilists

an advocate or practitioner of mercantilism; a national economic system in which a nation could regulate its domestic and international affairs so as to promote its own interests through a strong foreign-trade sector

no-trade boundary

the terms-of-trade limit at which a country will cease to export a good

outer limits for the equilibrium terms of trade

defined by the domestic cost ratios of trading nations

partial specialization

partial specialization when a country specializes only partially in the production of the good in which it has a comparative advantage

price-specie-flow doctrine

David Hume’s theory that a favorable trade balance was possible only in the short run, and that over time, it would automatically be eliminated via changes in product prices

principle of absolute advantage

in a two-nation, two-product world, international specialization and trade will be beneficial when one nation has an absolute cost advantage in one good and the other nation has an absolute cost advantage in the other good

principle of comparative advantage

ability to produce a good or service at a lower opportunity cost than others can produce it

production gains

increases in production resulting from specialization in the product of comparative advantage

production possibilities schedule

a schedule that shows various alternative combinations of two goods that a nation can produce when all of its factor inputs are used in their most efficient manner

region of mutually beneficial trade

the area that is bounded by the cost ratios of the two trading countries

terms of trade

the relative prices at which two products are traded in the marketplace

theory of reciprocical demand

relative demand conditions determine what the actual terms of trade will be within the outer limits of the terms of trade

trade triangle

an area in a production possibilities diagram showing a country’s exports, imports, and equilibrium terms of trade

trading possibilities line

a line in a production possibilities diagram representing the equilibrium terms-of-trade ratio