Lecture 8&9: Open Economy and International Macroeconomics Flashcards
(35 cards)
What are the two key choices in an open economy?
Choice between domestic vs. foreign goods, and domestic vs. foreign assets.
Why is international trade growing more slowly today?
No major new trade drivers (e.g. China’s WTO entry), failed liberalization, new non-tariff trade barriers, and US-China trade dispute.
What motivates international trade?
Arbitrage opportunities—buy or produce where it’s cheaper, sell where it’s more expensive (minus trade costs).
What are typical trade costs?
Transportation, customs duties, non-tariff barriers (e.g., regulations).
What are opportunity costs?
Cost of producing one good in terms of another that could have been produced.
What creates comparative advantage?
Ricardian model: Productivity differences (policy, climate, etc.)
Heckscher-Ohlin model: Factor endowment differences (abundant resources)
What is the main idea behind the Heckscher-Ohlin model?
Countries export goods that use their abundant (and cheap) factors of production, and import goods that use their scarce factors.
What are typical factors of production in the H-O model?
Labor, capital, land, and sometimes human capital or natural resources.
What does “factor abundance” mean?
A country has relatively more of a factor (like labor or capital) compared to other countries.
According to H-O, why does China export manufactured goods?
Because China is labor-abundant and manufactured goods are labor-intensive.
Why does the U.S. export pharmaceuticals and chemicals under the H-O model?
Because the U.S. is capital-abundant and those industries are capital-intensive.
How does the H-O model differ from the Ricardian model?
H-O: Trade arises due to factor endowments.
Ricardian: Trade arises from productivity differences.
What determines trade patterns in the H-O model?
The relative abundance of production factors in each country.
What does a country specialize in, according to H-O?
Goods that intensively use the country’s abundant factor.
What does the Stolper-Samuelson Theorem say in relation to H-O?
Trade benefits the abundant factor and hurts the scarce one.
A rise in the price of a good raises the return of the factor used most intensely, and reduces the return of the other factor.
How can trade increase inequality within a country?
If the abundant factor gains (e.g., capital), and the scarce factor loses (e.g., unskilled labor), income inequality can rise.
What are the efficiency gains from trade?
Specialization, economies of scale, innovation, and increased competition.
What are examples of protectionist tools?
Tariffs, quotas, non-tariff barriers, competitive devaluation.
What is competitive devaluation?
Intentionally lowering the value of a currency to boost exports.
What’s the difference between nominal and real exchange rate?
Nominal: Value of one currency in terms of another
Real: Adjusted for price level differences — indicates competitiveness
What does appreciation of a currency mean?
Currency gains value (e.g., fewer CHF needed per 1 Euro)
What are the two main exchange rate regimes?
Flexible: Determined by FX market (supply/demand)
Fixed: Government-maintained exchange rate
What causes short-run exchange rate changes?
Interest rate differences and expectations (speculation)
What causes medium-run exchange rate changes?
Inflation differentials, trade balances, public debt, economic growth
