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International Trade Economics > Before Midterm Study > Flashcards

Before Midterm Study Flashcards

1
Q

What does a Production Possibilities Frontier Show?

A

the different combinations of 2 goods that can be produced using all of my resources
-> shows all efficient output levels

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2
Q

What does it mean to trade?

A

Trade allows countries to consume at points beyond their PPF
-> Mutually agree - both parties agree

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3
Q

What is Absolute Advantage?

A

a country has a lower input requirement - (how many workers it takes to make more)

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4
Q

Why do we trade?

A

different opportunity costs
-> which is the benefit a person misses out on by choosing one option over another

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5
Q

What is the Factor Price Equalization Theorem?

A

Free trade of goods may lead to the equalization of factor prices, just like trade of factors would

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6
Q

What is the Intertemporal Model of Trade?

A

A country trades goods they make today for goods that they can consume tomorrow.
This implies one country will run a trade deficit today and a trade surplus tomorrow
(intertemporal means over time)

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7
Q

What is a comparative advantage?

A

The country with a lower opportunity cost has a comparative advantage

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8
Q

Why do Opportunity Costs differ?

A

-> Different Production costs
- technology: Ricardian Model
- Input availability (endowments): HO Model(the most productive firms trade)
- Productivity: New Trade Theory

-> Different benefits

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9
Q

What is Autarky

A

No trade
-> country has to make what it consumes

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10
Q

Gains from Trade
-> New Trade Theory

A

-> Intra-Industry Trade
- Export + Import even in the same product category.
-> Trade increases the number of varieties
-> Selection effect:
only the most productive firms will export
Import competition drives out

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11
Q

What is the New Trade Theory based on?

A

it is based on trade in varieties
it explains why we have intra-industry trade and trade between countries with similar relative endowments

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12
Q

What is the slope of the PPF?

A

Marginal Rate of Transformation (MRT)

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13
Q

What s the slope of the indifference curve?

A

Marginal Rate of Substitution (MRS)

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14
Q

What does Pareto Efficient mean?

A

The only way to benefit someone is to make someone else worse off.
-> Free trade is pareto efficient

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15
Q

Is trade a pareto improvement and if so what is does this mean?

A

-> Identify who gained and lost from trade
-> Get tax implemented

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16
Q

Effect of tariffs on small and large countries

A

small country = worse off
-> lose gain from specialization
If there’s no change in world price, because we are a small country, we as a whole, as a country are worse off.

large country = can gain
-> lose gain from specialization but can increase gain from exchange.
Has effect on world prices
RSw = sRS + (1-s)RS* where s = your importance in the world
If there’s no change

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17
Q

What does an increase in tariffs do to domestic + world prices?

A
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18
Q

What are iceberg costs?

A

higher per unit cost added when two countries open for trade in a monopoly

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19
Q

What happens to price when you import a good?

A

lowers price of good in a country

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20
Q

What happens to price when you export a good?

A

price rises of good in country

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21
Q

What does intensive look like

A

bigger number equals more intensive
where as opportunity cost is lower

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22
Q

Balance of Trade Surplus in the future

A

Autarky interest rate> TOT interest rate

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23
Q

Balance of Trade Surplus in the Present

A

Autarky interest rate < TOT interest rate

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24
Q

What does a steeper line mean?

A

higher interest rate

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25
When does a country export a good
when their price is greater than the opportunity cost to produce the good
26
What does importing mean?
consume more than you produce
27
What does exporting mean?
produce more than you consume
28
What does increased endowment do?
shifts the PPF out
29
What does decreased endowment do?
shifts the PPF in
30
Why do firms have higher fixed cots trading overseas?
it's harder to do things overseas
31
What does a trade surplus now mean?
Comparative advantage in present goods - Surplus now - Deficit later
32
-(1+i)^A <-(1+i)^TOT Which line is steeper?
TOT line is steeper - export present goods - import future goods Export now to pay for imports later
33
What does a trade deficit mean
You have a comparative advantage in future goods
34
-(1+i)^A > -(1+i)^TOT Which line is steeper?
Autarky line is steeper - import present goods - export future goods Country can trade at a lower interest rate than its autarky rate, reaching a higher indifference curve
35
What is an opportunity cost?
The benefit a person misses out on by choosing one option over another. When the opp cost of good X is lower for Country A than for Country B, we say that A has a comparative advantage in good X
36
What is the Rybczynski Theorem?
At fixed prices, when the supply/endowment of a factor increases, it will lead to an increase in the production of the good that uses that factor intensively and a reduction in the output of the other good. increase in endowment = increase in production Rby = Output -> Tech -> Endowment
37
What is the HO Theorem?
A country will tend to specialize in and export the good that uses its relatively abundant factor intensively HO = Prices -> Tech -> Endowment
38
What is the Stolper-Samuelson Theorem?
When the relative price of a good rises, the wage of the factor used intensively in the production of that good will rise, while the wage of the other factor will fall
39
What does abundance mean
The relative size of endowments
40
What are Superstars of Trade?
The small number of large, productive, innovative firms that comprise a significant share of national exports (and imports for that matter)
41
K/L > K(stars) /L(stars) Which country is abundant in what?
- Home is Capital (K) abundant - Foreign is Labour (L) abundant
42
Can a country have an abundance in one or both factors?
A country can have a size advantage in both factors but only an abundance in one
43
We say a country is capital abundant if
If a country has a higher capital-labour ratio than another (i.e. is endowed with a higher capital-labour ratio)
44
What can the terms of trade price be found using?
relative supply and relative demand or offer curves, which relate imports to exports
45
What does the HO model assume?
technologies are the same, but that the relative amounts of capital and labour differs between two countries
46
Where do the gains from trade come from?
an exchange and a specialization effect. It is also mutual because countries can choose a terms of trade price which lies between their differing opportunity costs.
47
Why does the gain from trade arise?
because they will be able to consume outside their PPF.
48
Under autarky, the optimal bundle is where the slope of the indifference curve, which is known as the Marginal Rate of Substitution (MRS) is equal to what?
the slope of the PPF, which is known as the Marginal Rate of Transformation (MRT)
49
Why is the PPF bowed out?
The opportunity cost of Y in terms of X goes up the more Y made. Since labour and capital are imperfect substitutes, as we make fewer X and more Y, more and more X must be given up for another Y.
50
What is the cone of diversification?
Information on capital intensity will help us tell when a country will diversify using the cone of diversification
51
What can be described using an Edgeworth Box?
The factor prices which drive capital intensity
52
What does the capital-labour ratio summarize?
The optimal mix of capital and labour
53
What does capital intensive mean?
If the capital-labour ratio of good X is greater than that for good Y, then we say that X is capital intensive
54
Graphically, the cost-minimizing combination of capital and labour is where what is tangent to what?
the isoquant is tangent to the lowest iso-cost curve. Mathematically, this is found using two equations: MPl/MPk = w/r and f(K,L) = Q.
55
Autarky - PPF
Reach the highest IC you can given your PPF These goods prices are matched with factor prices Prices reflect opportunity cost
56
To maximize profit
Hit highest revenue line you can given tech + endowment -> GDP As long as prices are between 0 and infinity, make both goods
57
PPF
- Starting from all y, zero opp cost of x. - Opp cost rises the more x you make (the amount of y you have to give up rises, the more x you make) - Hits infinity at all x, no y
58
Substitution Cost
K and L are not perfect substitutes within good. Goods are not perfect substitutes for each other in production
59
Kx > Ky
X is K intensive Y is L intensive
60
What should you be careful not to confuse?
Don't confuse factor abundance with factor intensity Countries: K/L vs. K*/L* Goods: K/Lx vs. K/Ly
61
Factor price differences drive what?
output price difference which drives opportunity cost
62
Marginal Rate of Technical Substitution
ratio of factor prices fl/fk = w/r
63
Cost function
wL + rK MPL/MPK = w/r wage - w rental rate - r Different combinations of K and L make 1x. Pick the cheapest - where the slope of the cost line = slope of isoquant
64
HO Production
- Perfect Competition - Constant returns to scale: Double inputs, double outputs - Identical technology across countries - Each good produced using two factors L- Labour K- Capital Both exogenously endowed Two "types of people skilled + unskilled
65
What are the assumptions of HO model?
Identical homothetic preferences 2 countries: home and foreign* 2 goods: x and y No trade costs
66
What are the assumptions of the Ricardian model?
Identical homothetic preferences (homothetic - demand side of the economy: utility function + indifference curves) Constant share of income on each good - taking income inequality problem out of demand. Income distribution =/ demand. 2 countries: home and foreign* 2 goods: x and y No trade costs
67
Why do firms have different opportunity costs?
Differences in endowment -> the most productive firms trade
68
Ricardian Model Production
- Perfect Competition: price takers, no influence on prices - Production function: Constant returns to sale: Double inputs, double outputs Uses one factor (labour)L-, exogenously endowed x = 2Lx so that unit labour requirement is alx = 0.5 y = 1/4ly so that unit labour requirement is aly = 4 Endowment of labour: Lx + Ly
69
What does x = 2Lx so that unit labour requirement is alx = 0.5 mean?
Need 1/2 worker to get 1 unit of x.
70
What does y = 1/4ly so that unit labour requirement is aly = 4
Need 4 workers to get 1 unit of y.
71
What is the slope of the Production Possibilities Frontier (PPF) driven by?
technology
72
What are the properties of indifference curves (IC)?
- everywhere on an IC is the same for preferences - higher IC is better - ICs don't cross - not transitive: goes against the rational consumer - ICs tend to be bendy - some degree of substitution If a country is on a higher IC, the entire country is better off.
73
What happens as trade occurs?
Home exports x: - Home x price rises Foreign Imports x: - Fgn x price falls Prices converge until they are equal across countries
74
Who benefits when two countries open up for trade in terms of technology?
both countries
75
Do countries almost always completely specialize in their exported product
No, not completely
76
When does a countries Production Possibilities Frontiers (PPF) expand/go left?
changes to endowments and/or technology
77
When two countries open up for trade with each other
prices converge between the autarky prices
78
Is there DWL in Autarky?
No, DWL=0 in autarky
79
What does a cost function look like
Cost function = VC.X + FC. where x is the number of units
80
What are three things to look out for when doing regression analysis?
- Sign: Positive/Negative - Statistical Significance: how sure you are that it isn't a zero effect (the more * - stars the more sure that the data isn't a zero effect). - Economic Significance: how large the effect is
81
Consider Ireland in autarky. It makes two goods: Pharma (r) is high-skill intensive: 1 high-skill worker for 1 low-skill. Textiles (t) are low-skill intensive: 1 HS worker for 5 LS workers. Open for trade with China, a low-skill abundant country. What happens to prices in Ireland?
H.O Theorem => (Pr/Pt) IE < (Pr/Pt) CH => prices converge to get Pr w/Pt As Pr/Pt rises in Ireland, want to specialize in pharma - Need to move both HS and LS workers to pharma - Price of pharma in Ireland increases - Want to increase pharma production - Need HS and LS workers but not at the same intensity - Since pharma is HS intensive, at current wages, leaves some LS workers unemployed This drives down their wages Pr/Pt rise leads to a rise in World HS / World LS (Whs/Wls)
82
What is Pareto Efficiency?
The only way to benefit someone is to make someone else worse off Trade is a Pareto Improvement if we redistribute - Identify who gained from trade - Identify who lost from trade - Get tax implemented
83
The New Trade Theories
- Better to work for an exporter - Most gains among high-skill in Global North - Selection effect shifts resources to the most productive firms - More productive firms also tend to pay higher wages . exporter wage premium @ 12%
84
Strong link between trade and income inequality.
In developing countries that are open to trade, low-skilled workers do see an increase in wages unlike developed countries.
85
Data:
If you export, you're better than the average firm. Firms that export have more workers. Thus, they are bigger. Firms that export are bigger than firms that don't. Exporters are: -> more productive -> larger five firms accounted for 43% of Irish goods exports 50 firms made up 75% of exports. The firms that export a lot also import a lot. People that work for firms that export have higher wages. -> varies by worker type Workers in top 40% benefit the most from the firm exporting - workers paid the highest salaries in a firm see the biggest gains from the firm exporting.
86
Summary: If you export, you’re better than the average firm. Firms that export have more workers. Thus, they are bigger. Firms that export are bigger than firms that don’t. Data says: Exporters are:  more productive  larger More productive exports not only export more, but exports are a bigger part of what they do.  Superstars. CSO data for Ireland (2022): - Five firms accounted for 43% of Irish goods exports (€88 billion) - Multinationals - Since Pharma dominates, you can guess who they are. - 50 firms made up 75% of exports. The firms that export a lot also import a lot.

International Trade Economics (9 decks)

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