Salvatore
c02.tex
V2 - 10/26/2012
1:33 P.M.
Page 52
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The Law of Comparative Advantage
in international trade? What did he think was the
proper function of government in the economic life
of the nation?
5.
In what way was Ricardo’s law of comparative
advantage superior to Smith’s theory of absolute
advantage? How do gains from trade arise with
comparative advantage? How can a nation that is
less efficient than another nation in the production
of all commodities export anything to the second
nation?
6.
What is the exception to the law of comparative
advantage? How prevalent is it?
7.
Why is Ricardo’s explanation of the law of com-
parative advantage unacceptable? What acceptable
theory can be used to explain the law?
8.
What is the relationship between opportunity costs
and the production possibility frontier of a nation?
How does the production possibility frontier look
under constant opportunity costs? What is the
relationship between the opportunity cost of a com-
modity and the relative price of that commodity?
How can they be visualized graphically?
9.
Why is a nation’s production possibility frontier
the same as its consumption frontier in the absence
of trade? How does the nation decide how much
of each commodity to consume in the absence of
trade?
10.
What is meant by complete specialization? by
incomplete specialization? Why do both nations
gain from trade in the first instance but only the
small nation in the second?
11.
How is the combined supply curve of both nations
for each of the traded commodities determined?
How is the equilibrium-relative commodity price
determined with trade?
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