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International trade and monetary systems > Midterm flashcards > Flashcards

Midterm flashcards

Sessions 1-12 content

1
Q

What is international trade?

A

The exchange of goods, services, capital and labour between countries.

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2
Q

What are the 4 main benefits of international trade?

A

Drives innovation

Encourages economic growth

Provides access to diverse markets

Lowers cost through specialisation

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3
Q

What is monetary policy?

A

Government/central bank actions to manage the money supply and interest rates.

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4
Q

What are the social benefits of trade?

A

Strengthens diplomatic ties.

Facilitates cross-border cooperation.

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5
Q

What are the key historical developments in monetary policy?

A

Gold standard

Fiat currency

Bretton Woods System

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6
Q

What are the primary objectives of monetary policy?

A

Controlling inflation

Managing unemployment

Ensuring economic stability

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7
Q

What is the conflict between economic theory and policy?

A

Economic theory supports free trade and comparative advantage.

Economic policy prioritises national interests.

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8
Q

What are the roles of the IMF, WTO and World Bank?

A

IMF: Provides loans but requires economic reforms.

WTO: Regulates trade and resolves disputes.

World Bank: Funds development projects.

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9
Q

How has globalisation changed trade patterns?

A

Shift from primary goods (raw materials) to manufactured goods & services.

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10
Q

What are the effects of FTAs?

A

Facilitate trade but may widen economic disparities.

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11
Q

What are the 3 types of protectionist policies?

A

Tariffs, quotas and subsisides.

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12
Q

What are the trade off’s of protectionism vs. free trade?

A

Free Trade: Increases efficiency, expands consumer choices.

Protectionism: Protects local industries but limits market competition.

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13
Q

Who benefits from international trade?

A

Consumers, export-driven industries and emerging economies.

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14
Q

Who loses from international labour?

A

Domestic industries and low-income countries

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15
Q

How do multinational corporations impact trade?

A

Positive: Create jobs, drive innovation.

Negative: Exploit labor, use tax havens, harm local businesses.

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16
Q

What is the gravity model of trade?

A

Trade flows depend on:

Economic size: Larger economies trade more.

Distance: Greater distance increases costs, reducing trade.

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17
Q

What are the environmental impacts of trade?

A

Positive: Transfers green technology.

Negative: Leads to resource depletion, deforestation, pollution.

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18
Q

What are the cultural impacts of trade?

A

Positive: Spreads culture, fashion, and food.

Negative: Causes cultural homogenization, loss of traditions.

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19
Q

How do exchange rates affect trade?

A

Weak currency: Exports become cheaper, imports more expensive.

Strong currency: Imports cheaper, exports more expensive.

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20
Q

What is comparative advantage?

A

A country has a comparative advantage if it can produce a good at a lower opportunity cost than another country.

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21
Q

How does trade allow countries to consume beyond their PPFs?

A

By specializing and trading, countries can access goods they don’t produce efficiently, moving beyond their Production Possibility Frontier (PPF).

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22
Q

What is the Ricardian model?

A

A model that suggests countries should specialize in goods where they have a comparative advantage.

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23
Q

What are the limitations of the Ricardian model?

A

Transport costs create trade barriers.

Multiple production factors (land, capital) exist in reality.

Income disparities affect trade patterns.

Government policies influence specialisation.

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24
Q

What is autarky?

A

A system where a country is economically independent and does not trade internationally.

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25
Which models help explain trade and income distribution?
The PPF The SPM (Specific Factors Model)
26
What is the SFM?
Expands on Ricardo’s model by including multiple production factors.
27
What are the two types of factors in the SFM?
Specific Factors: Fixed to a particular industry (e.g., land, capital). Mobile Factors: Can move between industries (e.g., labor).
28
What is a key assumption of the SMF?
The diminishing MPL
29
How does the PPF relate to trade and income distribution?
It illustrates the trade-offs in reallocating labor. Trade increases production, but economies do not fully specialize due to diminishing returns.
30
Why do economies not fully specialise in the short run?
Moving resources between industries has diminishing returns. Some factors are fixed and cannot easily shift.
31
What is the most efficient economic approach to trade?
Allow free trade and compensate negatively affected workers and industries.
32
What is wage convergance
The idea that global labor migration reduces wage disparities: High-wage countries: Increased labor supply → Wages decrease. Low-wage countries: Labor scarcity → Wages increase.
33
What does the GATT stand for?
General Agreement on Tariffs and Trade.
34
How do GATT and WTO differ in dispute resolution?
GATT: Resolved disputes through negotiations and mutual agreements. WTO: Provides a legally binding dispute settlement system.
35
How do GATT and WTO differ in coverage?
GATT: Focused only on trade in goods. WTO: Covers goods, services (GATS), and intellectual property (TRIPS).
36
How do GATT and WTO differ in institutional structure?
GATT: A provisional agreement, lacking a formal structure. WTO: A formal organization with defined governance.
37
What are the advantages of the WTO?
Enforceability, inclusivity, modernisation (e-commerce & environment)
38
What are the disadvantages of the WTO?
Favouritism (perceived)
39
What is the HO model?
A trade theory stating that countries export goods that use their abundant resources and import goods that require scarce resources.
40
What are the key assumptions of the HO model?
Two countries, two goods, two factors (labor and capital). Labor and capital can move within a country but not across borders. Comparative advantage arises from factor endowments.
41
What is the Leontief paradox?
Economist Wassily Leontief found that the U.S. (a capital-abundant country) exported more labor-intensive goods, contradicting the H-O model.
42
What are the challenges of the HO model?
Limited scope: Ignores technology, consumer preferences, and trade policies.
43
How has the HO model been expanded?
Technology: Productivity differences influence trade. Dynamic adjustments: Labor and capital shift over time. Global value chains: Products are made across multiple countries.
44
What are NIEs?
Newly industrialised economies are countries that transitioned from agricultural economies to manufacturing powerhouses through export-driven policies.
45
What strategies have NIEs used for growth?
Heavy investment in education and infrastructure. Adoption of advanced technology. Movement up the value chain.
46
What effects have NIEs had on advanced economies?
Job relocation: Manufacturing jobs moved overseas. Wage inequality: Low-skilled workers lost opportunities. Industry shifts: Advanced economies moved toward knowledge-based sectors.
47
What is the standard trade model?
A trade model that combines earlier trade theories to explain how countries trade, allocate resources, and determine welfare.
48
What are the key components of the standard trade model?
PPF, indifference curve, Tot
49
What are terms of trade (ToT)?
The ratio of export prices to import prices, measuring the benefits of trade.
50
What factors determine a country's production and consumption decisions?
Comparative advantage Opportunity cost Market prices
51
How does international trade improve economic welfare?
Greater variety of goods: Countries can consume beyond their PPF. Efficiency gains: Specialization leads to better resource allocation. Improved welfare: Higher ToT increases purchasing power.
52
How does economic growth affect trade outcomes?
Neutral growth: Expands all sectors equally, maintaining trade balance. Export-biased growth: Boosts export industries but worsens ToT. Import-biased growth: Expands import-competing industries, improving ToT.
53
How does trade impact income distribution?
Not all industries and labor groups benefit equally. Governments may use protectionist policies to mitigate disparities.
54
What is intertemporal trade?
Trade across time, where countries borrow or lend resources depending on their economic situation.
55
How does intertemporal trade work?
Borrowing countries: Import goods today and promise to export in the future. Lending countries: Export now to gain future benefits.
56
What are the benefits of intertemporal trade?
Borrowing finances development and infrastructure. Lending provides steady returns for surplus economies.
57
What are the risks of intertemporal trade?
Execcive borrowing can cause debt crises. Over-dependence on lending may weaken economic sovereignty.
58
What challenges do policymakers face in managing trade?
Addressing trade conflicts. Balancing domestic interests with global trade commitments. Preventing financial instability from over-reliance on borrowing.
59
What are economies of scale?
Cost advantages that businesses achieve as production output increases.
60
What are the two types of economies of scale?
Internal and external economies of scale.
61
What are internal economies of scale?
Cost reductions within a single firm due to improved efficiency in production, better technology and bulk purchasing.
62
What are external economies of scale?
Cost reductions due to industry-wide growth, benefitting all firms.
63
What are the sources of external economies of scale?
Industry clusters. Labour market pooling. Knowledge spillovers.
64
What are industry clusters?
Geographic concentrations of interconnected businesses that improve efficiency.
65
What are the characteristics of industry clusters?
Geographic proximity. Specialization. Shared workforce & infrastructure. Collaborative innovation.
66
What role does historical contingency play in trade?
Industry locations often result from historical accidents rather than strategy (path dependency).
67
What is the theory of dynamic increasing returns?
Costs decline as industries gain production experience. Learning-by-doing makes firms more efficient over time.
68
How do early entrants gain an advantage and why do they need protection?
First movers in an industry develop expertise, making them more competitive. However, emerging industries may need temporary protection to develop economies of scale.
69
How does interregional trade differ from international trade?
Interregional trade: Easier mobility of resources and labor. International trade: Faces regulatory and logistical barriers.
70
How does perfect competition affect trade?
Ensures efficient resource allocation. Encourages price stability and benefits consumers. Limits economies of scale, restricting firm growth.
71
How does monopoly affect trade?
Reduces competition, leading to higher prices. Can drive innovation through R&D investment. May restrict trade by controlling supply.
72
How does a duopoly affect trade?
Strategic interactions influence pricing and market access. Encourages technological advancements. Can create barriers to new entrants.
73
How does an oligopoly affect trade?
Firms may collude to set prices, impacting trade fairness. Encourages intra-industry trade through differentiation. Increased market power can lead to trade disputes.
74
How does imperfect competition affect trade?
Encourages product differentiation and market segmentation. Firms achieve economies of scale, reducing costs. Trade policies regulate unfair practices.
75
What are MNCs?
Companies operating in multiple countries, investing in production and operations abroad.
76
What is economic integration?
The process of reducing trade barriers and increasing economic cooperation.
77
How does economic integration improve productivity?
Encourages specialization and efficiency. Helps industries scale and become more productive.
78
Who wins and looses in economic integration?
Winners: Low-cost, efficient firms that expand into new markets. Losers: High-cost firms that cannot compete may exit the market.
79
What is the overall impact of economic integration?
Resources shift to the most efficient producers, improving industry-wide productivity.
80
What is free trade?
An economic policy where goods and services move across borders without restrictions.
81
Why is free trade beneficial?
Removes distortions caused by tariffs and quotas. Factors of production (labor, capital) move to more productive industries. Encourages economies of scale and innovation.
82
Which countries benefit the most from free trade?
Developing nations, as they rely on exports and foreign markets for growth.
83
Why is it difficult to measure the benefits of free trade?
Hard to quantify productivity improvements and innovation gains.
84
What is the terms of trade argument?
Applies to large importing countries. A small tariff can force exporters to lower prices, improving terms of trade. Risk: May lead to retaliation and trade wars.
85
What is the domestic market failures argument?
Protects industries from underdeveloped capital or labor markets. A tariff helps nurture industries until they become competitive. Risk: Tariffs may address the wrong problems and create economic distortions.
86
Why are tariffs considered the "second-best" option?
The best solution is to fix the root causes of inefficiencies (e.g., institutional reforms).
87
Why do governments protect inefficient industries?
The collective action problem: Consumers lose small amounts individually, so they don’t mobilize. Producers gain a lot, so they lobby strongly for protection.
88
What is ISI?
An economic strategy aimed at reducing reliance on foreign imports by promoting domestic production.
89
What is the economic argument behind ISI?
Based on the Infant Industry Argument: New industries need protection to grow and become competitive.
90
Why do developing countries need protection for new industries?
Imperfect capital markets: Developing countries lack strong financial systems to support new industries. Appropriability problems: First-mover firms bear high innovation costs, while later firms benefit for free.
91
What are the negative impacts of ISI?
Inefficiencies Limited scale High production costs Misallocation of resources
92
Why did many countries abandon ISI?
Economic inefficiencies and stagnation led to trade liberalization.
93
What was the effect of trade liberisation in developing countries?
Trade as a percentage of GDP tripled in many developing economies. Shift from agriculture to manufacturing exports. Higher economic growth in countries that successfully transitioned.
94
What shift did many developing countries make after ISI?
Adopted export-oriented policies to drive economic growth
95
What were the key goals of export-oriented policies?
Encourage global competitiveness. Leverage comparative advantage in labor, technology, and natural resources.
96
Why did export-oriented policies struggle in LATAM?
Weak institutional frameworks. Over-reliance on commodity exports. Lack of investment in advanced industries.
97
What are some controversies of trade liberisation?
Government intervention in industries. Job displacement in advanced economies. Environmental consequences.
98
What are the broader economic benefits of globalization?
Greater technological transfer between countries. Increased investment flows into developing nations, supporting infrastructure and industrial development.
99
What are the challenges of globalization?
Cultural homogenization: Global corporations dominate, reducing cultural diversity. Rising economic inequality: Trade liberalization benefits are not evenly distributed, leading to job losses and wage stagnation for low-skilled workers.

International trade and monetary systems (1 decks)

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