Question

1,

a. What is meant by “a deterioration in a nations terms of trade”?

b.

What is the relationship between:

a. specialization

b. trade

c. deindustrialization

Answer 1

Terms of trade is a measure of country's welfare as a result of trade. It takes the dollar value of volume of exports in the numerator and volume of imports in the denominator thereby resulting in an index. When the terms of trade deteriorate, it implies that the a nation is experiencing higher growth of imports than exports so there is trade deficit.

From the results of Ricardian theory of comparative advantage, countries try to specialize in the production of goods in which they have a relatively lower opportunity cost of production. From specialization we mean the allocating most of the resources in production of one or fewer goods only. This nation will then trade the same good in the world market and will increase the relative incomes of its allocated factors. Complete specialization results in closure of the industry which has a relatively higher opportunity cost. This results in deindustrialization and the product of this industry is then imported from another country that has comparative advantage in its production