The reasons for international trade: Practice Questions

Which statement correctly defines absolute advantage in the context of international trade?

The table shows the output per worker per day for two countries, X and Y, in the production of Wine and Cloth:
Country X: \(10\) units of Wine or \(5\) units of Cloth
Country Y: \(8\) units of Wine or \(2\) units of Cloth
According to the theory of comparative advantage, which statement is correct?

The table shows the maximum possible output of Coffee and Sugar for two countries, P and Q, using all available resources:

Country P: 40 units of Coffee or 20 units of Sugar
Country Q: 10 units of Coffee or 10 units of Sugar

Which of the following would be a mutually beneficial terms of trade for both countries?

What is the correct formula used to measure a country's terms of trade?

In international trade theory, what is represented by a country's trading possibility curve (TPC)?

Identify two main reasons, according to trade theory, why countries engage in international trade despite having the ability to produce goods domestically.

According to the theory of comparative advantage, explain why a country with an absolute advantage in the production of all goods can still experience an increase in its trading possibility curve (TPC) by engaging in international trade.

According to the theory of comparative advantage, why do countries typically experience incomplete specialization when their production possibility curves are bowed-out from the origin?

(a) Explain two limitations of the theory of comparative advantage when applied to modern international trade between economies. [4]

(b) Discuss how the presence of increasing opportunity costs—reflected in a bowed-out production possibility curve—affects the extent of specialization and the terms of trade between two trading partners. [4]