Chapter 1 In Class Notes

Question 1

Explain the classical Theory (theory of comparative advantage)

Answer 1

Labor productivity differs within country and across countries because of varying technology
Nations have relative advantages in certain products (e.g., Portugal had advantage in wine and England had advantage in cloth)
Countries benefit by shifting production and making products where they have an advantage and by trading with other countries (e.g., Portugal produces more wine and England produces more cloth)

Question 2

Neo-Classical

Answer 2

Productivity differences are explained by relative abandance of factors of production that is country with more capital focuses on capital-intensive industries like airplanes.

Question 3

Imperfect Markets

Answer 3

Nations have different resources so they are forced to trade with one another. This trade mutually benefits both nations.

Question 4

Gravity

Answer 4

more trade occurs between countries of similar affluence and size and close proximity

Question 5

Firm-Level product life cycle

Answer 5

a firm initially sells/produces in its domestic market. As time goes on, the firm may begin to export, and then consider producing in foreign locations to imagine

Question 6

Product lifecycle

Answer 6

When a product is initially added into a global market, it will have a competitive advantage. As time goes on theirs more competition.

Question 7

New Trade

Answer 7

Producers seek economies of scale (production expands), while consumers want diversity in products

Question 8

Industry agglomeration

Answer 8

exchange of ideas, labor market pooling, development of related industries.

Question 9

Porter’s Diamond

Answer 9

Explains why nations have advantage in certain products:
Factor conditions
Demand conditions
Related and Supporting Industries
Firm Strategy, Structure and Rivalry