International Trade and Finance

Question 1

Theory that countries should specialize in resources for which they have lower opportunity costs

Answer 1

Comparative Advantage

Question 2

Author of Political Economy and Taxation who popularized Comparative Advantage

Answer 2

David Ricardo

Question 3

Theory related to comparative advantage suggesting that countries export goods which require factors of production that they have an abundance of.

Answer 3

Heckscher-Ohlin Model (2x2x2 model)

Question 4

Paradox rooted in the fact that America exports more labor intensive goods and imports products that are more capital intensive than its exports despite being the most capital abundant nation in the world.

Answer 4

Leontief’s Paradox

Question 5

How many factor of productions a country has available before trade

Answer 5

Factor Endowment

Question 6

Possible resolution to Leontief’s Paradox suggesting countries trade more with other countries that have similar demands (hence why developed nations trade with each other a lot).

Answer 6

Linder hypothesis

Question 7

Model of trade developed by Jan Tinbergen based on both the size of two countries’ economies as well as the distance between them.

Answer 7

Gravity Model of Trade

Question 8

Diagrams visualizing the results of the Heckscher Ohlin Model

Answer 8

Lerner Diagrams

Question 9

Index for measuring intra-industry trade.

Answer 9

Grubel-Lloyd Index.

Question 10

the fact that goods will tend to be produced in and exported from countries that have high domestic demand.

Answer 10

Home Market Effect

Question 11

Trade theory focused on the implications of increasing returns to scale rather than assuming returns to scale are constant. Protectionist theory.

Answer 11

New Trade Theory.

Question 12

How much of one currency one could buy with another currency

Answer 12

Exchange Rate

Question 13

Prices are higher in developed countries than developing countries

Answer 13

Balassa-Samuelson Effect

Question 14

Currency that is linked to the Dollar or Euro at a fixed rate in order to maintain stability.

Answer 14

Pegged Currency

Question 15

When a currency’s exchange rate is fixed, but allowed to fluctuate within a certain band of values.

Answer 15

Crawling Peg

Question 16

Concept that something will have the same value globally when some factors are accounted for.

Answer 16

Law of One Price

Question 17

Way of calculating exchange rates through a basket of goods approach, in order to eliminate influence of currency manipulation and speculation.

Answer 17

Purchasing Power Parity

Question 18

Term for the process of currency manipulation to offset effects of appreciation

Answer 18

Sterilization

Question 19

Equation governing relationship between interest rates and exchange rates

Answer 19

Uncovered Interest Rate Parity

Question 20

Arbitrage strategy focused on borrowing low interest rate currency to fund the buying of high interest rate currencies. Vulnerable to volatile exchange rates.

Answer 20

Carry Trade

Question 21

Fact that a country can’t maintain independent monetary policy, free movement of capital, and fixed exchange rates. Only two of the three are possible.

Answer 21

Mundell Fleming Trilemma