Economics: International Trade & Finance

Who is the economist credited with developing the theory of absolute advantage?

Adam Smith argued that a country has an absolute advantage when it can produce a good more efficiently than any other country.

What is the core principle of David Ricardo's theory of comparative advantage?

Countries should specialize in producing goods for which they have the lowest opportunity cost, even if they lack an absolute advantage.

According to the Heckscher-Ohlin model, what determines a country's comparative advantage?

A country's comparative advantage is determined by its relative factor endowments, such as the abundance of land, labor, or capital.

How is the 'Terms of Trade' for a nation typically calculated?

Terms of Trade is calculated as the ratio of an index of export prices to an index of import prices.

What is the primary difference between an import tariff and an import quota?

A tariff is a tax on imported goods that generates government revenue, while a quota is a physical limit on the quantity of goods imported.

What are 'quota rents' in the context of international trade barriers?

Quota rents are the extra profits earned by the holders of import licenses when a quota restricts supply and drives up domestic prices.

Which international organization succeeded the General Agreement on Tariffs and Trade (GATT) in 1995?

The World Trade Organization (WTO) is the global body that regulates trade rules and settles disputes between member nations.

In a floating exchange rate system, what primary factors determine the value of a currency?

The value is determined by market forces of supply and demand, influenced by interest rates, inflation, and trade balances.

What does it mean when a currency 'appreciates' against another currency?

Appreciation means the currency has increased in value, allowing it to buy more of a foreign currency than before.

What are the three primary components of the Current Account in the Balance of Payments?

The Current Account includes the balance of trade (goods and services), primary income (investment earnings), and secondary income (transfers).