1 - INTRO, GRAVITY MODEL OF TRADE & COMPARATIVE ADVANTAGE Flashcards
WHAT IS INTERNATIONAL ECONOMICS?
International economics is the study of economic interactions between sovereign states, involving concerns like trade, capital flows, and international policy coordination, different from domestic economics.
WHAT ARE THE MAIN THEMES OF INTERNATIONAL ECONOMICS?
Gains from trade, pattern of trade, protectionism, balance of payments, exchange rate determination, international policy coordination, and international capital market.
WHAT IS THE GRAVITY MODEL OF TRADE?
The gravity model predicts trade flow between two countries based on their economic size (GDP) and distance, suggesting larger economies trade more and that trade decreases with greater distance.
HOW IS THE GRAVITY MODEL FORMULATED?
Tij = A × Yi × Yj / Dij,
where:
- Tij is the trade flow between countries i and j,
- Yi and Yj are their GDPs,
- Dij is the distance,
- and A is a constant.
WHAT DOES THE GRAVITY MODEL PREDICT ABOUT TRADE?
It predicts that trade is proportional to economic mass (GDP) and inversely proportional to physical distance, meaning larger and closer economies will trade more.
WHAT FACTORS BESIDES ECONOMIC MASS AND DISTANCE AFFECT TRADE?
Institutional arrangements (like borders and trade agreements), language, and cultural factors also influence trade, and are not fully captured by the gravity model.
WHAT IS COMPARATIVE ADVANTAGE?
Comparative advantage is the ability of an entity to produce a good or service at a lower opportunity cost than another, enabling gains from trade through specialization.
HOW DOES COMPARATIVE ADVANTAGE AFFECT INTERNATIONAL TRADE?
Countries specialize in producing goods where they have a comparative advantage, leading to more efficient resource allocation and greater overall gains from trade.
WHAT IS AN EXAMPLE OF COMPARATIVE ADVANTAGE IN PRACTICE?
If Miriam is better at ironing shirts and Karl is better at cleaning rooms, they both save time by specializing and trading their services, illustrating comparative advantage.
WHAT ARE THE GAINS FROM TRADE?
Countries benefit from trade by specializing in what they produce best, exchanging goods or services for what they need, which increases overall welfare and efficiency.
WHAT ARE SOME IMPEDIMENTS TO TRADE ACCORDING TO THE GRAVITY MODEL?
Physical distance, transportation costs, communication barriers, and borders reduce the volume of trade between countries.
WHAT IS THE BALANCE OF PAYMENTS?
The balance of payments is a record of all economic transactions between a country and the rest of the world, including trade, investment, and financial transfers.
WHAT IS EXCHANGE RATE DETERMINATION?
Exchange rate determination involves setting the value of one currency in terms of another, influenced by factors like inflation, interest rates, and market speculation.
WHAT ROLE DO GOVERNMENT POLICIES PLAY IN INTERNATIONAL TRADE?
Governments may impose tariffs, subsidies, or other policies to promote or restrict trade, often balancing between protecting domestic industries and encouraging free trade.
WHY IS INTERNATIONAL ECONOMIC POLICY COORDINATION IMPORTANT
In an integrated global economy, one country’s economic policies can affect others, making coordination necessary to manage shared challenges like inflation or financial crises.
