International Trade Theory

Question 1

NAFTA

Answer 1

North American Free Trade Agreement

Question 2

TPP

Answer 2

Trans Pacific Partnership

Question 3

FDI

Answer 3

Foreign Direct Investment

Question 4

Absolute Advantage

Answer 4

a country has absolute advantage in the production of a product when it is
more efficient than any other country at producing it. If another country have absolute advantage in
a another product- the countries could really benefit for trading with each other.

Question 5

Explain Smiths theory of absolute advantage

Answer 5

• He argued that the invisible hand of the market mechanism should determine what a
  country exports and imports- not the government.
• Mercantilism weakens country in long run; enriches only a few
  A country should:
• Should specialize in production of and export products for which it has absolute
  advantage; import other products
• Has absolute advantage when it is more productive (produces at lower cost) than
  another country in producing a particular product

Question 6

Free trade

Answer 6

refers to a situation where the government does not attempt to influence trade, what a
citizen can buy from another country or produce and sell to another country.

Question 7

Comparative advantage

Answer 7

Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners.
makes sense for a country to specialize in producing those goods that it can produce most efficiently, while buying goods that it can produce relatively less efficiently from other countries.
opening a country to free trade stimulates economic growth, which creates dynamic gains from trade. Empirical evidence seems to be consistent with this claim.
unrestricted free trade bring about increased world production-that is, that trade is a positive sum-game.
Read more in notes

Question 8

Opportunity cost

Answer 8

The opportunity cost of good A in terms of good B is the number of unit of good B
that could be produced with the same resources used to produce a given number of
units of good A.
• Opportunity costs is the largest sacrifice made to produce a given good

Question 9

Constant returns to specialization

Answer 9

the units of resources required to produce a good, are assumed
to remain constant no matter where one is on a country’s production possibility frontier (PPF).

Question 10

PPF - Product possibility frontier

Answer 10

shows the maximum possible output combinations of two

goods or services an economy can achieve when all resources are fully and efficiently employed.

Question 11

Diminishing returns

Answer 11

when more units of resources are required to produce each additional unit.

Diminishing returns shows that it is not feasible for a country to specialize to the degree
suggested by the simple Ricardian model.

Question 12

Dynamic gain from free trade

Answer 12

• Gain in the stock of a county’s resources
• The county can produce more of both goods
• Opening an economy for free trade results in dynamic gain but stimulate economic growth.

Question 13

What did Samuelson argue?

Answer 13

that in some circumstances- dynamic gains can lead to an outcome that is not
beneficial. Fx USA buying from poorer China- Wallmart can sell cheaper- but that doesn’t mean
they will give a crap about the wage of the people working in Wallmart.

Question 14

What is the Hecscher-Ohlin theory?

Answer 14

They put forward a different explanation of comparative advantage- that arises from differences in
national factor endowments (explained futher up).

Nations have varying factor endowments and different factor endowments explain differences in
factor costs. The larger/abundant (bigger potion) a factor the lower the cost.
They predict countries
- With will export good that make intensive use of factor that are locally abundant- USA a
long substantial exporter of agricultural goods
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- While importing goods that make intensive use of factor that are locally scarce- importing
goods produced in China, that have relative abundance of low-cost labor in manufacturing
industries.
- Argues free trade is beneficial
- International trade is determined by differences in factor endowments, and not differences in
productivity

Question 15

What is the Leontief paradox

Answer 15

Leontief said- because the United States was relativey abundant in capital compared to other
nations, the USA would be an exporter of capital-intensive goods and importer of labor-intensive
goods.- though he was wrong and its called a paradox

Question 16

The product life-cycle theory

Answer 16

suggests that early the life cycle, most new products are produced
in and exported from the country in which they were developed- so as a new product becomes more
internationally accepted- the production starts in other countries. The theory suggests the products
may in the end be exported back to the country of its origin.

Question 17

Rayon Vernon

Answer 17

• He argued the size and wealth of the U.S market have U.S firms an incentive to developed
new consumer products.
• Also that high laborcost gave the U.S firms an incentive to develop cost-saving process
innovations.
• U.S switches from being an exporter of the product to an importer of the product as
production becomes concentrated in lower-cost foreign locations.

Question 18

Product life-cycle theory in the twenty first century

Answer 18

• Vernon’s argument that most new products are developed and introduced in the U.S is
  outdated. Might have been true in the 1945-1975
• Many new products are now first introduced in Japan (video consoles) or South Korea
  (smartphones) .
• Many new products are simultaneously introduced in the United states and Europa and Asia

Question 19

What are some new trade theories?

Answer 19

Economics of scale
Diseconomics of scale
Constant returns to scale

Question 20

Economics of scale

Answer 20

unit cost reductions associated with large scale output.
• the best way to achieve high efficiency and low unit cost, is through the mass production of
a standardized output.

Question 21

Diseconomics of scale

Answer 21

(referred also as decreasing returns) refer to the property whereby long-run
average total cost rises as the quantity of output increases.
• An alternative definition would be output increasing at a slower rate than the rate of
increase in inputs

Question 22

Constant returns to scale

Answer 22

refers to the property whereby long-run average total cost stays the same
as the quantity of output increases
• An alternative definition would be output increasing at the same rate as the rate of
increase in inputs

Question 23

What are some types of competition?

Answer 23

Perfect competition
Imperfect competition
- Monopoly
- Oligopoly
- Monopolistic competition
- Monopsony
- Oligopsony

Question 24

Perfect competition

Answer 24

an economic model that describes a hypothetical market form in which no
producer or consumer has the market power to influence prices, ie., all act as price takers. The
analysis of perfectly competitive markets provides the foundation of the theory of supply and
demand.

Question 25

Imperfect competition

Answer 25

the competitive situation in any market where the conditions necessary
for perfect competition are not satisfied.

Question 26

Monopoly

Answer 26

only one seller of a good.

Question 27

Oligopoly

Answer 27

small number of sellers

Question 28

Monopolistic competition

Answer 28

there are many sellers producing highly differentiated

goods, but each has some power to influence prices.

Question 29

Monopsony

Answer 29

only one buyer of a good.

Question 30

Oligopsony

Answer 30

Small number of buyers

Question 31

Explain the new trade theory

Answer 31

Paul Krugman, in some cases, countries specialize in the production and
export of particular products, not because of differences in factor endowments, but because in
certain industries the world market can support only limited number of firms fx commercial aircraft
industry- so the first firms to enter are able to build a very competitive advantage.

Question 32

Factor endowments

Answer 32

commonly understood as the amount of land, labor, capital,

and entrepreneurship that a country possesses and can exploit for manufacturing.

Question 33

What does the new trade theory say about increasing product variety and reducing cost?

Answer 33

• New trade theory get a market to have variety and reducing cost of making the good
• In a world with international trade, the producing of a good is limited to the national market
  and economies of scale couldn’t happen, making prices higher and reducing the variety of
  products.

Question 34

What are some implications of the new trade theory?

Answer 34

• The theory suggests nations may benefit from trade even when they do not differ in resource
  endowments or technology
  29
• Trade allows a nation to specialize in the production of certain products
• Attaining svale economies
• Lowering the cost og production
• Buying specialized products from other nations
• So the variety of products increases and the average costs should fall- freeing resources to
  produce other goods/service
• First mover advantage is good – the first ot become specialized
• Quite use in explaining trade patterns

Question 35

Explain Porters Diamond

Answer 35

The determinants of national competitive advantage

• Factor endowments
  • land, labor, capital, workforce, infrastructure
  (some factors can be created…)
• Demand conditions
  • large, sophisticated domestic consumer base; offers an innovation friendly
  environment and a testing ground
• Related and supporting industries
  • local suppliers cluster around producers and add to innovation
• Firm strategy, structure, rivalry
  • competition good, national government

Question 36

Balance-of-payment accounts

Answer 36

National accounts that track both payments to and receipts from foreigners. Is divided into three main sections:

• Current account
• The capital account
• Financial account

Question 37

Current account

Answer 37

records transactions involving the export or import of goods and services.

Question 38

A current account deficit

Answer 38

the current account of the balance of payments is in deficit when a
country imports more goods, service and income than it exports.

Question 39

The capital account

Answer 39

records one-time changes in the stock of assets – capital transfer, such as debt
forgiveness and migrants’ transfers

Question 40

The financial account

Answer 40

transaction that involve the purchase and sale og assets- fx when a German
firm purchases stock in a U.S company or buys a U.S bond- the transaction enters the U.S balance
of payments as a credit on the financial account.

Question 41

What did Mercantilists argue?

Answer 41

that it was in a country’s best interest to run a balance-of-trade surplus. They viewed trade as a zero-sum game, in which one country’s gains cause losses for other countries.

Question 42

What has some new trade theorists promoted about the idea of strategic trade policy?

Answer 42

The argument is that government, by the sophisticated and judicious use of subsidies, might be able to increase the chances of domestic firms becoming first movers in new industries.

Question 43

Why are theories of international trade important to businesses?

Answer 43

primarily because they can help the firm decide where to locate its various production activities

Question 44

What can firms involved in international trade influence?

Answer 44

Firms involved in international trade can and do exert a strong influence on government policy toward trade. By lobbying government, business firms can promote free trade or trade restrictions.