Chapter 3 Flashcards
What are the limitations of the Ricardian Theory?
Assumes labor is the sole input, ignoring income distribution effects across resources like capital or land
What is the Heckscher-Ohlin (Factor-Endowment) Theory?
Nations export goods that intensively use their abundant resources and import goods that use their scarce resources
What is the basis of the Trade in HO theory?
Determined by differences in pre-trade relative product prices, which reflect a country’s resource endowments and factor prices
What does the capital/labor ratio predict about a country’s export patterns?
Countries with higher capital/labor ratios export capital-intensive goods, while labor-rich countries export labor-intensive goods
What is a limitation of the HO theory?
Doesn’t explain two-way trade in the same product (U.S. and Germany export and import autos)
What is the Factor-Price Equalization Theory?
Trade raises the price of abundant factors and lowers the price of scarce factors across nations, tending to equalize factor prices
Why is Factor-Price Equalization rare?
It is rare due to frictions like transportation costs, trade barriers, and productivity differences
What is the Stolper-Samuelson Theorem?
Free trade benefits owners of abundant resources and hurts owners of scarce resources in each country
Define Overlapping Demands (Linder Hypothesis):
Suggests countries with similar income levels will trade similar but differentiated goods due to shared preferences
Define specific factors theory:
Factors that are industry-specific determine trade winners and losers
What are job polarization concerns?
Trade and technology boost demand for skilled labor but can hurt unskilled workers unless training and education expand
What are economies of scale?
As firms grow, the cost per unit falls, promoting specialization and trade even among countries with similar factor endowments
What are internal economies of scale?
Occur within a firm; firms in large domestic markets (home-market effect) enjoy production cost advantages
