Untitled Deck Flashcards
(32 cards)
What economic theory advocates that countries should encourage exports and discourage imports?
Mercantilism
Propagated in the sixteenth and seventeenth centuries, mercantilism emphasizes trade surpluses.
Who proposed the theory of unrestricted free trade in 1776?
Adam Smith
Smith’s theory highlighted the benefits of free trade and the market mechanism.
What is free trade?
A situation where a government does not influence trade through quotas or duties.
What is the main benefit of international trade according to the text?
Allows countries to specialize in efficient production and trade for other goods.
What does David Ricardo’s theory of comparative advantage explain?
International differences in labor productivity and trade patterns.
What is the Heckscher–Ohlin theory focused on?
Differences in national factor endowments, such as land, labor, and capital.
What is the flaw of mercantilism?
It views trade as a zero-sum game.
What does absolute advantage refer to?
A country being more efficient than any other country at producing a product.
Fill in the blank: A country should specialize in producing goods for which it has an ________ advantage.
absolute
What happens when a country has an absolute advantage in the production of all goods?
It might derive no benefits from international trade according to Smith.
What is the main message of the theory of comparative advantage?
Potential world production is greater with unrestricted free trade than with restricted trade.
What can cause a shift in a country’s production possibility frontier (PPF) outward?
Dynamic gains from trade, such as increased resource stock or efficiency.
What does the Samuelson critique highlight?
Potential wage decreases in a rich country after entering a free trade agreement with a poorer country.
What does the Leontief paradox illustrate?
The unexpected result that U.S. exports were less capital intensive than U.S. imports.
What is the product life-cycle theory based on?
The observation that many new products are developed by U.S. firms and sold first in the U.S. market.
True or False: New Trade Theory emphasizes that countries may specialize in production due to first-mover advantages.
True
What is the primary focus of New Trade Theory?
The limited number of firms that can exist in certain industries.
What are the key factors that influence comparative advantage according to Heckscher-Ohlin?
- Factor endowments
- Resource availability
- Production costs
Fill in the blank: The gains from trade arise because countries can _______ in the production of certain goods.
specialize
What does diminishing returns to specialization imply about resource use?
More units of resources are required to produce each additional unit.
What is the implication of dynamic effects on economic growth from trade?
They can lead to an outward shift of a country’s PPF.
Who are the economists associated with the development of New Trade Theory?
Paul Krugman and others in the 1980s.
What is the main argument of Vernon regarding U.S. firms developing new consumer products?
The wealth and size of the U.S. market provide a strong incentive for U.S. firms to develop new consumer products.
This argument also considers the high cost of U.S. labor as a motivator for cost-saving process innovations.
What does the new trade theory emphasize about economies of scale?
The ability of firms to attain economies of scale has important implications for international trade.
Economies of scale lead to unit cost reductions associated with large scale output.
