This workbook is designed for students using the textbook International Economics, 5th edition. It provides brief chapter summaries and practice problems to enhance the understanding of material presented in class. For each chapter in International Economics, 5th Edition, the study guide provides a summary, list of chapter objectives and different types of questions with worked answers at the end of the book. The questions are in four formats: multiple choice, true or false, short answer and essay answer.
Frequently asked questions
Yes, you can cancel anytime from the Subscription tab in your account settings on the Perlego website. Your subscription will stay active until the end of your current billing period. Learn how to cancel your subscription.
No, books cannot be downloaded as external files, such as PDFs, for use outside of Perlego. However, you can download books within the Perlego app for offline reading on mobile or tablet. Learn more here.
Perlego offers two plans: Essential and Complete
Essential is ideal for learners and professionals who enjoy exploring a wide range of subjects. Access the Essential Library with 800,000+ trusted titles and best-sellers across business, personal growth, and the humanities. Includes unlimited reading time and Standard Read Aloud voice.
Complete: Perfect for advanced learners and researchers needing full, unrestricted access. Unlock 1.4M+ books across hundreds of subjects, including academic and specialized titles. The Complete Plan also includes advanced features like Premium Read Aloud and Research Assistant.
Both plans are available with monthly, semester, or annual billing cycles.
We are an online textbook subscription service, where you can get access to an entire online library for less than the price of a single book per month. With over 1 million books across 1000+ topics, we’ve got you covered! Learn more here.
Look out for the read-aloud symbol on your next book to see if you can listen to it. The read-aloud tool reads text aloud for you, highlighting the text as it is being read. You can pause it, speed it up and slow it down. Learn more here.
Yes! You can use the Perlego app on both iOS or Android devices to read anytime, anywhere — even offline. Perfect for commutes or when you’re on the go. Please note we cannot support devices running on iOS 13 and Android 7 or earlier. Learn more about using the app.
Yes, you can access International Economics Study Guide and Workbook by Dana Stryk in PDF and/or ePUB format, as well as other popular books in Business & Business General. We have over one million books available in our catalogue for you to explore.
PATTERNS OF TRADE AND THE GAINS FROM TRADE: INSIGHTS FROM CLASSICAL THEORY
IMPORTANT POINTS
1. The concept of absolute advantage originates from Adam Smith’s labor theory of value. The real cost of a commodity is the labor time required to produce the good. For example, if a shoemaker makes a pair of shoes in five hours and a tailor sews a dress in ten hours, the real cost of these goods is five and ten hours respectively. Individuals trade these goods using the real exchange rate or barter terms of trade. In the previous example, the tailor requires two pairs of shoes for each dress she creates since dress production requires twice the number of labor hours as shoe manufacturing.
2. An example can illustrate how absolute cost differences lead to mutual gains from trade. In Table 2–1 the number of days required to produce cloth and wine are listed.
Table 2–1: Absolute Cost Example
Days of Labor
Country
Required to Produce
England
France
Wine (1 barrel)
160
20
Cloth (1 bolt)
40
200
Since England takes fewer days to produce one bolt of cloth (40 days versus 200 days), it has an absolute advantage in the production of cloth. France has an absolute advantage in the production of wine since it only needs 20 days to produce a barrel, compared to 160 days in England. Without trade, one bolt of cloth exchanges for 1/4 barrel of wine in England, reflecting the fact that wine production requires four times as many days as cloth production. In France, one bolt of cloth exchanges for 10 barrels of wine.
Based on absolute cost differences, England should move its resources out of wine and into cloth production, while France should specialize in wine production. England will export cloth to France in exchange for wine only if it receives more than 1/4 barrel of wine for every bolt of cloth exported. France will purchase imported British cloth only if it pays less than 10 barrels of wine for every imported bolt of cloth.
Assuming the number of days used to produce cloth and wine in both countries remains unchanged, total production will increase as a result of specialization. Suppose that prior to trade, each country produces one barrel of wine and one bolt of cloth. This means that England uses 200 days for production while France uses 220 days. With specialization, England devotes all its resources to cloth production, producing 5 bolts of cloth. France produces 11 barrels of wine. Total cloth production increases by 3 bolts of cloth (2 bolts produced prior to trade, 5 bolts with specialization), while total wine production increases by 9 barrels of wine (2 barrels produced prior to trade, 11 barrels with specialization). Both countries gain from specializing since total world production and consumption increases.
3. The absolute advantage theory does not help to explain trade patterns when one country can produce both goods at a lower absolute cost. Instead, the concept of comparative advantage explains the basis for trade. David Ricardo showed that the requirements for mutually beneficial trade depend upon relative costs. More specifically, a country with an absolute disadvantage in the production of all goods has a relative advantage in the production of at least one commodity. In Table 2–2, England has an absolute advantage over France in the production of cloth and wine.
Table 2–2: Comparative Cost Example
Days of Labor
Country
Required to Produce
England
France
Wine (1 barrel)
40
100
Cloth (1 bolt)
30
150
In the absence of trade, production constrains each country’s consumption of the two goods. Labor hours used to produce wine mean that less cloth can be produced. Production in each country incurs an opportunity cost, measured by the amount of one good given up in order to produce the other commodity. In England, the opportunity cost of producing one bolt of cloth is measured in terms of lost wine production. If one bolt of cloth is produced, 30 production days are devoted to cloth production and cannot be used for wine production, which means that for every bolt of cloth produced, 3/4 barrel of wine cannot be produced. Thus, the opportunity cost of producing one bolt of cloth in England is 3/4 barrel of wine. (This rate is calculated by determining how many bolts of cloth or barrels of wine could be produced if 30
In France, the opportunity cost of producing an additional bolt of cloth is 3/2 barrels of wine. This country uses 150 production days to produce one bolt of cloth. In that same time, the country could have produced 3/2 barrels of wine. (This rate is calculated by determining how many bolts of cloth or barrels of wine could be produced if 150 days exist for production:
Based on these opportunity cost calculations, England has a comparative advantage in the production of cloth since the opportunity cost of cloth production in England (3/4 barrel of wine) is less than the opportunity cost of cloth production in France (3/2 barrels of wine). According to the Ricardian model of comparative advantage, England should specialize in the production of cloth while France specializes in the production of wine even though England has an absolute advantage in the production of both goods.
In order for both countries to have an incentive to engage in trade, the terms of trade must lie between the two opportunity cost ratios. If this value is 1 bolt of cloth for 1 barrel of wine, each country gains from trade. Previously, France had to give up 3/2 barrels of wine to get one bolt of cloth. With trade, France obtains one bolt of cloth for one barrel of wine, a savings of 1/2 barrel. England benefits from trade since it can obtain more wine for every bolt of cloth (3/4 compared to 1).
Total production increases as a result of specialization. Suppose that prior to trade, each country produced one bolt of cloth and one barrel of wine. (This implies that England has 70 production days and France has 250 production days. To find these numbers, add the amount of time needed to produce one unit of each good for each country.) With specialization, each country maintains the same number of production days, but specializes in its comparative adva...
Table of contents
Cover
Half Title
Title Page
Copyright Page
Table of Contents
LIST OF TABLES
LIST OF FIGURES
Chapter 2: Patterns of Trade and the Gains From Trade: Insights From the Classical Theory
Chapter 3: Trade Among Dissimilar Countries: Insights From the Factor-Proportions Theory
Chapter 4: Trade Among Dissimilar Countries: Implications of Decreasing Costs and Imperfect Competition
Chapter 5: The Theory of Protection: Tariffs and Other Barriers to Trade
Chapter 6: Arguments for Protection and the Political Economy of Trade Policy
Chapter 7: International Mobility of Labor and Capital
