CH 3 Flashcards
Capital-labor Ratio
A country’s ratio of capital inputs to labor inputs.
Dynamic Comparative Advantage
A changing pattern in comparative advantage; governments can establish policies to promote opportunities for changes in comparative advantage over time.
Economies of Scale
When increasing all inputs by the same proportion results in a greater proportion of total output.
External Economies of Scale
Cost reductions for a firm that occur as the output of the industry increases. Trade becomes necessary as production becomes concentrated in one area.
Factor Endowment Theory
Asserts that a country exports those goods that use its abundant factor more intensively.
Factor-price Equalization
Free trade’s tendency to cause cheap factors of production to become more expensive, and the expensive factors of production to become cheaper.
Heckscher-Ohlin Theory
Differences in relative factor endowments among nations that underlie the basis for trade.
Industrial Policy
Government policy that is actively involved in creating comparative advantage.
Inter-industry Trade
The exchange between nations of products of different industries.
Internal Economies of Scale
Reductions in the average total cost of producing a product as a firm increases the size of its plant in the long run. There are barriers to entry along with product differentiation. International free trade allows the firms to grow, increases production selection, and lowers prices.
Intra-industry Trade
Two-way trade in a similar commodity.
Luddites
Bands of English textile workers who demolished machinery that they felt was threatening their jobs in the early 1800s.
Product Life Cycle Theory
Many manufactured goods undergo a predictable trade cycle; during this cycle, the home country initially is an exporter, then loses its competitive advantage vis-à-vis its trading partners, and eventually may become an importer of the commodity.
Specific Factors
Factors of production that are unable to move into or out of an industry.
Specific Factors Theory
Considers the income distribution effects of trade when factor inputs are immobile among industries in the short term.
Stolper-Samuelson Theorem
An extension of the theory of factor-price equalization, which states that the export of the product that embodies large amounts of the relatively cheap, abundant resource makes this resource more scarce in the domestic market.
Theory of Overlapping Demands
Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods; wealthy nations will likely trade with other wealthy nations, and poor nations will likely trade with other poor nations.
Transportation Costs
The costs of moving goods from one nation to another.
Explain Airbus-Boeing Conflict
Airbus received subsidies and unheard-of borrowing terms while Boeing received indirect subsidies from government investment in flight tech and tax breaks in their states of operation. The two companies have since put aside their dispute to focus on the state-owned Chinese airplane manufacturer entering the market.
Industrial Policy Pros
- Economic growth (greater GDP, more income, and therefore greater tax revenue)
- Spillover benefits: knowledge/tech spillover; public investment leads to private investment.
- Trade protection: shields domestic producers. Tariff.
Industrial Policy Cons
- Government spending increases.
- There is uncertainty in which industries to protect and how much to protect them.
- Illegal under WTO (world trade organization)
Industrial Policy Methods (3)
Lower interest loans, subsidies, or tax breaks
Product Life Cycle Stages
Introduction, Growth, Maturity, and Decline.
Production Life Cycle Curve Shape
Check Notes
Production Life Cycle Curve Relation to Same Product’s Consumption Curve
Why are Products Produced in Developed Countries Early in their life cycles and in underdeveloped countries during the end of their life cycle?
In Introduction the product needs to be researched and Designed which is expensive. Production is also expensive. Additionally demand is concentrated in developed countries. All three can only be accomplished in developed countries. Overtime the product becomes “standardized” and viable for production in underdeveloped countries.
Furthermore, CA is shifting from developed countries to underdeveloped countries.
Product Life Cycle Theory
In economies of scale in less than perfect competition, CA is shifting. A product moves through a life cycle in the order of introduction, growth, maturity, and decline. It is initially produced in developed countries and is later produced in underdeveloped countries.
Factor Price Equalization. What is it? What happens to prices of factors of production? Who wins short-term? Who wins long-term?
In the long run, relative prices of inputs equalize across trading countries.
Abundant exported factor price goes up and scarce imported factor price comes down; the prices equalize.
The industry that produces exported good wins (both factors in industry win).
The abundant factor of production wins because the price goes up.
Specific Factors Theorem
In the short run, the industry with the CA wins as price of good increase
Stolper-Samuelson Theorem
In the long run, the input used intensively in the good with the CA wins as the price of
the input increases
Hecksher-Ohlin (Factor Endowment) Model
2 goods, 2 countries, 2 factors of production.
Increasing cost as you specialize (curved PPC).
CA in goods comes from relative abundances of factors of production.
Encompasses Specific Factors Theorem, Stolper-Samuelson Theorem, and Price Equalization Theorem.
David Ricardo
Comparative Advantage and Ricardian/Classical Model
Classical Model
2 goods, 2 countries, and 1 factor of production.
Straight PPF curve; constant opportunity costs.
Adam Smith
Wealth of Nations, Absolute Advantage, and Trade as a positive sum game.
Mercantilism
Trade is a zero sum game. Countries should push exports and accumulated gold.
PPF/PPC
A curve that shows the possible production combinations of two goods from one country.
