Unit II Important Terms and Concepts Flashcards
Mercantilism
A system of government policies and institutions aimed at increasing exports and decreasing imports.
What was Adam Smith’s objection to mercantilism?
Argued that mercantilism lowered a country’s standard of living due to tariffs.
He also advocated for free international trade.
Emphasized advantages of specialization and international division of labor whereby nations specialize in the production of only a few goods.
What is Absolute Advantage?
It is the ability of a country to produce a good using fewer productive inputs than is possible anywhere else in the world.
What was David Ricardo’s law on Absolute Advantage?
That countries should specialize
where they have their greatest absolute
advantage (if they have absolute advantage
in both goods) or in their least absolute
disadvantage (if they have an absolute
advantage in neither good).
What are terms of trade?
The relative price at which trade occurs between countries.
What is consumption gain?
A’s consumers are able to buy goods more cheaply.
What is production gain?
International trade causes A’s production to be focused on industries where A’s labor is relatively more efficient.
Describe the Heckscher-Ohlin Model.
A country will have comparative advantage
in, and therefore will export, that good
whose production is relatively intensive in
the factor with which that country is
relatively well endowed.
Imagine two countries, Country A and Country B, with different factor endowments. Country A has an abundance of skilled labor, while Country B has an abundance of unskilled labor.
As a result of this specialization, Country A will import goods that are labor-intensive, as it has a scarcity of unskilled labor. Conversely, Country B will import goods that are skill-intensive, as it lacks skilled labor.
Describe the Rybczynski Theorem.
At constant world prices, if a country
experiences an increase in the supply of one factor, it will produce more of the product intensive in that factor and less of the other.
What is the Stolper-Samuelson Theorem?
Free international trade benefits the
abundant factor and harms the scarce
factor.
What is the Leontief Paradox?
The finding that U.S. exports tend to be
more labor-intensive than U.S. imports,
while U.S. imports are relatively more
capital-intensive than U.S. exports.
What is the Grubel-Lloyd Index?
A measure of intra-industry trade given by: IIT = [1-Sum|Exp-Imp| / Sum(Exp+Imp)]
The Human Skills Theory explains what?
Explains the Leontief paradox:
Since the U.S. has highly trained, educated
workers relative to other countries, U.S.
exports tend to be skilled-labor intensive.
Describe the Product Life Cycle Theory.
Comparative advantage may shift over time from
one country to another due to product life cycle
Stages of the cycle:
– Product is invented and introduced in home country
– Product becomes standardized
– Foreign production begins
– Comparative advantage shifts to foreign country
What does the Similarity of Preferences Theory detail?
Trade occurs among rich countries (with
similar standards of living) due to similar
tastes and product differentiation.
Also explains Intra-Industry Trade.
