An educational worksheet covering key international trade terms like opportunity cost and comparative advantage through a practical country example.

Let's solve the problem by filling in the blanks in the passage using the provided vocabulary list. The goal is to correctly apply economic terms to complete the text logically and accurately.

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Vocabulary List:

- opportunity cost
- comparative advantage
- competitive advantage
- absolute advantage
- international trade
- foreign direct investment
- gross domestic product
- production cost
- gross national product
- domestic trade
- protectionism
- free trade

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Now, let’s go through the passage sentence by sentence and fill in the blanks with the most appropriate term.

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1. "_________________________ is the exchange of goods and services between countries."

✔ Answer: *International trade*

> Explanation: This is the definition of international trade — the exchange of goods and services across national borders.

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2. "But these two countries realize that they could produce more by focusing on those products with which they have a _________________________."

✔ Answer: *comparative advantage*

> Explanation: Countries specialize in producing goods for which they have a lower opportunity cost (i.e., comparative advantage), not necessarily because they are better at producing them (absolute advantage). In this example, even though Country B is more efficient overall, both benefit from specializing based on comparative advantage.

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3. "We can see then that for both countries, the _________________________ of producing both products is greater than the cost of specializing."

✔ Answer: *opportunity cost*

> Explanation: The opportunity cost refers to what is given up when choosing one option over another. Here, it means that producing both goods incurs a higher opportunity cost compared to specializing.

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4. "Note that, in the example above, Country B could produce both wine and cotton more efficiently than Country A (less time). This is called an _________________________, and Country B may have it because of a higher level of technology."

✔ Answer: *absolute advantage*

> Explanation: Absolute advantage means being able to produce more output using fewer resources. Since Country B uses less time to produce both goods, it has an absolute advantage.

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5. "International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of _________________________, which is the amount of money that individuals invest into foreign companies and other assets."

✔ Answer: *foreign direct investment*

> Explanation: Foreign Direct Investment (FDI) involves investing money directly into businesses or assets in another country. This promotes economic integration and growth.

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6. "For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. These raise employment levels and, theoretically, lead to a growth in the _________________________."

✔ Answer: *gross domestic product* (GDP)

> Explanation: GDP measures the total value of goods and services produced within a country. FDI increases production, employment, and income, thereby increasing GDP.

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✔ Final Filled-In Passage:

INTERNATIONAL TRADE

International trade is the exchange of goods and services between countries.

Let's take a simple example. Country A and Country B both produce cotton sweaters and wine. Country A produces 10 sweaters and six bottles of wine a year while Country B produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to produce 10 sweaters and three hours to produce six bottles of wine (total of four hours).

But these two countries realize that they could produce more by focusing on those products with which they have a comparative advantage. Country A then begins to produce only wine and Country B produces only cotton sweaters. Each country can now create a specialized output of 20 units per year and trade equal proportions of both products. As such, each country now has access to 20 units of both products.

We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specializing.

Note that, in the example above, Country B could produce both wine and cotton more efficiently than Country A (less time). This is called an absolute advantage, and Country B may have it because of a higher level of technology.

International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment, which is the amount of money that individuals invest into foreign companies and other assets. In theory, economies can therefore grow more efficiently and can more easily become competitive economic participants.

For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. These raise employment levels and, theoretically, lead to a growth in the gross domestic product. For the investor, FDI offers company expansion and growth, which means higher revenues.

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✔ Summary of Answers:

1. international trade
2. comparative advantage
3. opportunity cost
4. absolute advantage
5. foreign direct investment
6. gross domestic product

This exercise illustrates key concepts in international economics: comparative vs. absolute advantage, opportunity cost, specialization, and benefits of trade and FDI.