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Who is the economist associated with the Theory of Absolute Advantage?
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Adam Smith
What is the key concept of the Theory of Comparative Advantage?
The ability to produce goods at a lower opportunity cost compared to other countries.
How does the Theory of Absolute Advantage suggest countries benefit from trade?
By specializing in products they can produce most efficiently and trading for goods they are less efficient at producing.
What does the Factor Price Equalization Theory suggest happens to comparative advantages over time?
They diminish as factor prices equalize due to factor mobility across countries.
What example is used to explain the Theory of Comparative Advantage?
Michael Jordan, who focuses on basketball and delegates typing tasks based on income potential.
What is a key limitation of the traditional trade theories, such as those of Smith and Ricardo?
They often rely on a simplified 2-country/2-product model, not accounting for the complexities of the global economy.
What does the Theory of Comparative Advantage suggest about a country that does not have an absolute advantage in any good?
The country can still benefit from trade by focusing on goods with the lowest opportunity cost.
What happens to factor prices according to the Factor Price Equalization Theory?
Free trade will equalize the price of traded products and factors of production among countries over time.
What assumption is shared by many international trade theories that may not reflect real-world conditions?
The assumption of perfect competition.
What challenge is associated with the assumption of 'constant returns to scale' in trade theories?
It's unrealistic because it doesn't account for economies of scale in practical scenarios.
According to traditional trade theories, why is the assumption of 'full employment' problematic?
It assumes all resources are fully utilized, which is often not the case in reality.
Which economists developed the Heckscher-Ohlin Theory?
Eli Heckscher and Bertil Ohlin
According to the Heckscher-Ohlin Theory, why should Korea produce labor-intensive goods?
Because Korea has an abundance of labor relative to capital.
Which theory suggests that countries will export goods that use their abundant factors of production more intensively?
Heckscher-Ohlin Theory
Give an example illustrating the Theory of Absolute Advantage.
Brazil should specialize in coffee, and India should specialize in pulses. Brazil exports coffee to India and imports pulses from India.
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