Lecture 8 - International Trade Flashcards
(20 cards)
What is comparative advantage?
A country has comparative advantage in producing a good if its opportunity cost is lower than other countries. Basis for beneficial trade even without absolute advantage.
What determines trade patterns?
Differences in:
1. Shocks (risk-sharing)
2. Relative productivity (comparative advantage)
3. Absolute productivity (factor flows)
What is the trade balance formula?
NX = EX - IM
NX > 0: Surplus
NX < 0: Deficit
NX = 0: Balanced
What is the current account?
NX + net income abroad + net transfers. Broader measure than trade balance.
Why has global trade increased since WWII?
- Lower transport/communication costs
- Reduced tariffs (e.g., GATT/WTO)
What is intertemporal trade?
Countries run deficits in bad times/surpluses in good times to smooth consumption. PDV of trade must balance to zero.
What is the Ricardian model?
2-country, 2-good model showing gains from specialization based on comparative advantage.
How to calculate opportunity cost?
OC of good X = (Units of Y sacrificed)/(Units of X gained)
Example: If 1 worker makes 160 apples or 16 computers, OC of 1 computer = 10 apples
What happens under autarky?
Countries produce both goods. Prices equal opportunity costs. Lower total output than with trade.
What are gains from trade?
- Higher total production
- Increased consumption possibilities
- Welfare improvement (see North/South apple-computer example)
What determines world prices?
Equilibrium where export supply = import demand. Lies between autarky prices of trading partners.
What is the twin deficits hypothesis?
Budget deficit (G>T) may correlate with trade deficit (NX<0) if private savings = investment.
What are costs of trade?
- Job losses in comparative-disadvantage sectors
- Adjustment costs (retraining)
- Uneven distribution of benefits
What is free migration’s impact?
Workers move to higher-productivity countries. Can increase global output more than trade but benefits accrue unevenly.
What was UK’s 2022 current account?
Deficit of ~4% GDP (varies by year)
What is absolute advantage?
Ability to produce more of a good with same inputs. Different from comparative advantage.
How does specialization work?
Countries fully specialize in comparative-advantage goods under free trade (e.g., North: computers, South: apples)
What is the national income identity?
Y = C + I + G + NX
Rearranged: NX = Y - (C + I + G)
Why fast-growing countries run surpluses?
- Export-led growth policies
- High savings rates
- Industrial subsidies
What limits debt sustainability?
- GDP growth < interest rates
- Lender confidence
- Inflation/default risks
