Ch 13 - Trade policy

Question 1

What do trade theories explain?

Answer 1

The observed trade patterns between countries and their welfare consequences

Question 2

What paved the way for new trade theories?

Answer 2

The mixed success of old theories in explaining inter-industry trade and the inability to account for large, observed within industry trade

Question 3

Name 3 sources of comparative advantage

Answer 3

Countries’ factor endowments
Technological differences
Consumer preferences

Question 4

What is comparative advantage?

Answer 4

An economy is able to produce a particular good or service at a lower opportunity cost than its trading partners

Question 5

In a competitive equilibrium, the marginal rate of transformation, _______ and the __________ are all equal

Answer 5

Marginal rate of substitution, price ratio

Question 6

Assuming 2 countries never choose 0 consumption of any commodity, the outcome with free trade is an improvement over__________

Answer 6

Autarky

Question 7

Trade models featuring productivity based comparative advantage are called _______

Answer 7

Ricardian models

Question 8

Trade models featuring comparative advantage due to relative abundance of FOP are called ______

Answer 8

Heckscher-Ohlin models

Question 9

New trade theories fail to account for _________

Answer 9

Large productivity disparities across firms within narrowly defined industries

Question 10

Define the gravity model

Answer 10

Trade flows between 2 regions are positively related to the income of the trading partners and negatively related to the distance between the two. The gravity model outlines factors the influence trade costs and size of the target market

Question 11

What is trade liberalisation?

Answer 11

Removal of barriers to trade

Question 12

Name 4 gains from trade liberalisation

Answer 12

Superior consumption baskets
Utilisation of economies of scale and lower production costs
Access to larger markets increases incentives to invest in innovations
Contraction and exit of low productivity firms and expansion of high productivity firms

Question 13

Name 3 distributional impacts of trade liberalisation

Answer 13

Increase in the price of factors
Increase in inequality
Increase in unemployment

Question 14

What justifies restricted trade?

Answer 14

Gov might be concerned about inequality

Presence of mkt failures and externalities

Question 15

What is the infant industry argument?

Answer 15

Nascent industries with increasing returns to scale are unable to operate at a profitable scale in the presence of foreign competition

Question 16

What are trade barriers

Answer 16

Whereby participating countries mutually agree to ease off trade barriers to the transfer of goods, services or workers between themselves