Questions for Review with Answers
Chapter 15. Market Theory I. Comparative Advantage
I. Basics
Chapter 15 – Question 1
What are the most important features of capitalist markets?
* Their most important features are: They are impersonal, self-regulating systems; they are based on the freedom of contract; they distribute incomes.
II. Why There Are Markets
Chapter 15 – Question 2
What are the gains from trade?
* The gains from trade consist in the main in the increase in the quantity and variety of goods available for consumption. The bundle of goods to be consumed is not identical with the bundle of goods produced.
III. Why Trade Is Beneficial to Everybody
Chapter 15 – Question 3
Distinguish absolute advantage and comparative advantage.
* Absolute advantage stands for higher productivity. Comparative advantage stands for lower opportunity costs.
Chapter 15 – Question 4
The gist of comparative advantage is: Inputs remain constant, output and consumption rise. Explain how this happens.
* Each country specialises in the product in which it has a comparative advantage. This enhances overall output of both commodities. After trade, each country has a higher quantity of its comparative-advantage product and the same quantity of its non-comparative advantage product that it had before specialisation and trade.
Chapter 15 – Question 5
How do you compute a commodity's opportunity costs?
* Divide what you give up by what you gain. An example: A country can produce 100 units of A or 200 units of B. The opportunity costs of 1 unit of A is 200/100 = 2 B.
Chapter 15 – Question 6
Write down the formula to calculate the terms of trade.
* Terms of trade = Index of export prices x 100
Index of import prices
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