Block 1 -International Trade Theory Flashcards
(105 cards)
What is the definition of globalisation?
The integration of markets and market mechanisms to facilitate market activity
‘The shift toward a more integrated and interdependent world economy’ (Hill 2021)
What are the two aspects of globalisation?
The Globalisation of markets and the globalisation of production
Explain the globalisation of markets?
Lowering of trade barriers
Standardised offerings across nations and segments
Explain the globalisation of production?
Sourcing factors of production from diverse locations around the world
This improves time to marketovercoming the logistical limitations of a global reach
It improves cost management by giving access to cheaper sources
What is the IMF?
A lender of last resort to troubled economies
Head - Kristalina Georgiva
What is the WTO?
Intermediary and negotiator to ensure trade agreements are abided by
Head: Dr Okonio-Iweala
Why are the WTO not happy with Trump at the moment?
He is breaching current trade agreements, acting in contrary to the WTOs overall aim
What are the purposes of the UN?
Maintain peace and security
Develop friendly relations among nations
Achieve international cooperation in solving economic, social, cultural or humanitarian issues
Be a centre for harmonzing the actions of nations
Which institutions help to facilitate globalisation?
IMF
WTO
UN
What do international markets offer us?
Higher uncertainty and risk
Variation on law and organisational rights
Barriers to market and securing payment
High competition
Low visbility
Potential for higher profitability and expansion
What are the gains of trade?
Allows countries to specialise in production of goods they produce most efficiently, whilt importing those it does not produce most efficiently
FDI inflows
Increasing balance payments
What are the classical trade theories?
Mercanilism (16th-18th century)
Absolute advantage (Smith 1776)
Comparative advantage (Ricardo 1817)
What are the neo classical trade theories?
Heckscher-Ohlin theory
What are the modern trade theories?
Product lifecycle theory (Vernon 1966)
New trade theory (Krugman 1980)
Porters diamond (Porter 1990)
GVCs (Gereffi and Fernandez Stark 2016)
What is Mercantilism?
An advocation that countries should simultaneously encourage exports and discourage imports
Remains relevant despite its age, but carries unintended consequences
Countries subsidise exports and placed quotas on imports through government intervention
What did mercantilists initially overlook + reference?
The inflationary effects of subsidising exports and placing quotas on imports
This had a resulting impact on trade surpluses as theirgoods became too expensie for other country and imports began to look attractive
Hume argued that a trade surplus would lead to an inflow of gold and silver, increasing the domestic money supply and causing inflation. This would make exports more expensive and imports cheaper, eventually eliminating the surplus.
(David Hume)
Explain how Donald Trump adopts mercantilism
He advocates neo-mercantilist policies, typically characterized by forms of trade protectionism and activist economic policy, in which political power is equated with economic power and economic power with a balance of trade surplus
Explain absolute advantage + reference?
A country has an absolute advantage when it is more efficient than anyone else at producing a good
Explains why unrestricted free trade is beneficial
It is not a zero sum game, and some countries can produce goods at a lower cost
So. if a country has an absolute advantage in something it should specialise in its production, and import the rest from other countries
(Smith 1776)
Explain comparative advantage + reference?
Explains what might happen when a country has an absolute advantage in the production of ALL goods
Counteracted Smith by saying a country should produce what they are most efficient at and trade the rest, even if that means importing goods they could produce more efficiently themselves
Suggests that trade is a positive sum game in which al participants realise economic gains
(Ricardo 1817)
What assumptions does Smith apply in his absolute advantage principle?
1) The quantity of any industry is limited by its capital
2) He applies opportunity cost to individuals (e.g. the farmer doesnt make his own shoes)
3) He applies opportunity cost to international commercial policy (nations should also specialise)
4) Perfect competition (no trade frictions) and also that trade products can be achieved in equivalent value
What are other considerations of Ricardos comparative advantage principle?
1)Immobile resources - not all potential capacity can be switched to production of most efficient goods
2) Diminishing returns - at high levels of production we may need more resources to produce each additional unit
3) Dynamic effects and economic growth - the country may grow its economy, increase the stockl of some resources such as labour as the population grows
What is the Heckscher-Olin theory
Builds on Ricardos theory of comparative advantage
Suggested that the comparative advantage arises through differences in factor enndowments
Suggests that countries will export goods that make intensive use of factor endowments that are locally abundant, and import scarce resources
E.g. US substantial exporter of agricultural goods, as it has an unusual abundance of arable land
Is a less powerful explanation of real world trade patterns than once thought
What are the limitations of the Hecksher-Ohlin theory?
- Assumption of equal technology access
For example, South Korea shifted from a labor intensive economy to a capital intensive econony of semi conductors, as a result of tech investment, HO theory does not account for this - Limited mobility of capital and labour
Theory assumes that labor and capital cannot move internationaly, but globalisation contradicts this
E.g. factories in US moving to Mexico for cheaper labour - Overemphasis on factor endowments
Overlooks important factors such as policies and trade agreements
e.g. Chinas manufacturing dominance is not only due to abundant labour but also to infrastructure development and favourable trade policies
What is the Leontief paradox?
The observation that some countries dont necessarily export in the ways that Hecksher-Olin suggests
E.g. Postulates that as US was relatively abundant in capital compared to other natoins, the US would be exporter of capital intensive goods and importer of labour intensive goods, however, US exports were less capital intensive as imports = Leontief paradox (Hecksher-Olin theory contradicted itself)
for example, wealthy countries may produce laboour intensive products when we would expect them to import these
is an important observation as it begins to identify frictions that occur within otherwise neat economic explanations previously given
