Key models and Theories sem 1

Question 1

Ricardian Model of Trade

Answer 1

Countries should focus production in what they are relatively better at producing i.e. where they have the lowest opportunity cost and hence more productive workforces as they can keep costs lower

Question 2

Hecksher Ohlin Model implications

Answer 2

Countries should focus production in industries/goods where they have a factor endowment i.e. the US with capital intensive goods

Leontief, Baldwin and Romalis

Question 3

Scale economy models

Answer 3

Internal is falling cost of production due to the size of the firm and external is falling costs due to the size of the industry/market.

Assume a monopolistic competition model.

Question 4

What are the implications of a monopolistic competition model on patterns of trade

Answer 4

Implies that intra industry trade is beneficial due to heterogenous goods and firms compete for FDI. Trade increases market size which increases the number of firms, lowers the cost and increases welfare. Refer to Feenstra and Weinstein ,Broda and Weinstein and lastly Trefler

Question 5

Median Voter Theorem

Answer 5

Political parties will change their policies to court the median voter in the political spectrum. Change tariff rates to get the highest number of votes is an example.

Assumes a two political party system i.e. US

Fajelbaum et al (2020) proves this

Question 6

Collective Action

Answer 6

Challenged Median Voter Theorem. Political activity is a public good but is more effective for smaller groups with more shared objectives than large groups that have large information costs.

Question 7

Protection for Sale

Answer 7

Politicians win elections due to funding from groups who do not have a collective action problem and advocate for special interest policy e.g. agriculture (subsidies) and clothing (MFA)