DIŞ TİCARET - Deneme Sınavı - 5

Every choice or option on the production possibilities frontier involves a tradeoff. In other words, some amounts of a commodity must be given up in order to get some more amounts of the other commodity. Due to the limited resources, every decision either about economics or about daily routines has a tradeoff. Thus, all tradeoffs involve a cost, referred as opportunity cost. Opportunity cost is the highest cost of the preferred alternative. Production possibilities frontier (PPF) gives the total supply of a country. Indifference curve (I) represents the total demand of a country.

Constant returns to scale refers to the same amount of output increase with the increase within the factors of production. Labor-abundant country means that the ratio of the total amount of labor to the total amount of capital available in the country is greater than the other country. On the other hand, capital-abundant country means that the ratio of the total amount of capital to the total amount of labor available in the country is greater than the other country. Labor-intensive commodity is produced with a higher (L/K) ratio than the other commodity in both countries. Capital-intensive commodity is produced with a higher (K/L) ratio than the other commodity in both countries.

The assumption that ‘There is incomplete specialization in the production in both countries.’ postulates that both countries are continuing to produce both commodities. Countries trade with each other with respect to the comparative advantage under free trade. Each country specializes in the production of the commodity in which it has comparative advantage but does not end up to produce the other commodity in which it has a comparative disadvantage.

General equilibrium of an economy is determined by the intersection of the production possibilities frontier, the autarky relative price line, and the indifferent curve.

The quantities of the commodities that a country would like to export and import are perfectly represented by an offer curve.

International Factor Price Equalization Theorem deals with the international distribution of income. Stolper-Samuelson Theorem deals with the distribution of income effects of international trade within a trading country. Heckscher-Ohlin Theory states that comparative advantage of the trading countries is explained exclusively by differences in relative supply conditions. Classical Trade Theory which has been accepted as the primer of the international trade theory assumes that the country whose labor is more productive in producing the commodity that is subject to international trade has a comparative advantage in this commodity. Briefly, the basis of international trade solely depends on the differences of labor productivity.

Stolper-Samuelson Theorem depends on the International Factor Price Equalization Theorem. In spite of the similarities between them, Stolper Samuelson Theorem explains the distribution of income effects of international trade within a trading country while International Factor Price Equalization Theorem deals with the international distribution of income effects of international trade. According to the Stolper-Samuelson Theorem, international trade does not increase the income of all the factors of production but only the income of the factor that is intensively used in the production of the exported commodity. At the general equilibrium point of the International Factor Price Equalization Theorem, both the relative factor prices and relative commodity prices are equalized.

Elasticity of substitution of factors of production measures the ease with which one factor of production can be substituted for another within the production as the relative price of the factor declines. For example; suppose that the elasticity of substitution of labor for capital is much greater in the production of corn than in the production of wheel. Thus, it is much easier to substitute labor for capital in the production of corn than in the production of wheel.

Factor-Intensity Reversal explains the situation in which a commodity is the labor-intensive commodity in the labor-abundant country and the capital-intensive commodity in the capital- abundant country. All the other items are related to Specific Factors Model.

Classical Trade Theory which has been accepted as the primer of the international trade theory assumes that the country whose labor is more productive in producing the commodity that is subject to international trade has a comparative advantage in this commodity. The correct answer is A.

In the international trade analysis, production possibilities frontier (PPF) represents the total supply of the trading country while total demand is exhibited by the indifference curve (I). The correct answer is E.

Opportunity cost is the highest cost of the preferred alternative. It is a ratio. All tradeoffs involve an opportunity cost. Similarly, opportunity cost is the highest-valued (not the lowest-valued) alternative that is given up. The correct answer is C.

The rate at which a person or a country will give up the commodity measured
at the Y axis to get an additional unit of commodity measured at the X axis is called marginal rate of substitution (MRT). MRT is an important determinant in preference analysis. The correct answer is C.

The Heckscher-Ohlin Theory stands on twelve simplifying assumptions. The following are among these assumptions:

However, 

The correct answer is E.

According to the Heckscher-Ohlin Theory, demand preferences are the same (not different) in both countries: According to this assumption, tastes are equal in both of the trading countries. As explained before, demand preference of a country is examined by community indifference curves. Since demand preferences are the same in both countries, a single indifference curve is used in order to represent both the countries’ identical tastes. The correct answer is B.

Constant returns to scale refers to the same amount of output increase with the increase within the factors of production. The correct answer is A.

The Classical Trade Theory or simply the Ricardian Model assumes that comparative advantage of the countries solely depends on the relative differences in the productivity of labor. Nevertheless, it does not explain the reason of these productivity differences. Heckscher-Ohlin Theory was developed to respond to two questions that had not been answered by the Classical Trade Theory: (1) What is the determinant of the comparative advantage of the countries? (2) How does international trade affect the earnings of the factors of production within the trading countries? The correct answer is E.

General equilibrium of an economy is determined by the intersection of the production possibilities frontier, the autarky relative price line, and the indifferent curve. The correct answer is D.

Magnification effect postulates that a change in the price of a commodity leads to a relatively more change on the income of the factor used intensively in its production in the same direction. The correct answer is B.

Labor theory of value The theory assumes that the price of a commodity is determined by the amount of labor going into the production of the commodity.