CH 3

Question 1

Capital-labor Ratio

Answer 1

A country’s ratio of capital inputs to labor inputs.

Question 2

Dynamic Comparative Advantage

Answer 2

A changing pattern in comparative advantage; governments can establish policies to promote opportunities for changes in comparative advantage over time.

Question 3

Economies of Scale

Answer 3

When increasing all inputs by the same proportion results in a greater proportion of total output.

Question 4

External Economies of Scale

Answer 4

Cost reductions for a firm that occur as the output of the industry increases. Trade becomes necessary as production becomes concentrated in one area.

Question 5

Factor Endowment Theory

Answer 5

Asserts that a country exports those goods that use its abundant factor more intensively.

Question 6

Factor-price Equalization

Answer 6

Free trade’s tendency to cause cheap factors of production to become more expensive, and the expensive factors of production to become cheaper.

Question 7

Heckscher-Ohlin Theory

Answer 7

Differences in relative factor endowments among nations that underlie the basis for trade.

Question 8

Industrial Policy

Answer 8

Government policy that is actively involved in creating comparative advantage.

Question 9

Inter-industry Trade

Answer 9

The exchange between nations of products of different industries.

Question 10

Internal Economies of Scale

Answer 10

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.

Question 11

Intra-industry Trade

Answer 11

Two-way trade in a similar commodity.

Question 12

Luddites

Answer 12

Bands of English textile workers who demolished machinery that they felt was threatening their jobs in the early 1800s.

Question 13

Product Life Cycle Theory

Answer 13

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.

Question 14

Specific Factors

Answer 14

Factors of production that are unable to move into or out of an industry.

Question 15

Specific Factors Theory

Answer 15

Considers the income distribution effects of trade when factor inputs are immobile among industries in the short term.

Question 16

Stolper-Samuelson Theorem

Answer 16

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.

Question 17

Theory of Overlapping Demands

Answer 17

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.

Question 18

Transportation Costs

Answer 18

The costs of moving goods from one nation to another.

Question 19

Explain Airbus-Boeing Conflict

Answer 19

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.

Question 20

Industrial Policy Pros

Answer 20

• 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.

Question 21

Industrial Policy Cons

Answer 21

• Government spending increases.
• There is uncertainty in which industries to protect and how much to protect them.
• Illegal under WTO (world trade organization)

Question 22

Industrial Policy Methods (3)

Answer 22

Lower interest loans, subsidies, or tax breaks

Question 23

Product Life Cycle Stages

Answer 23

Introduction, Growth, Maturity, and Decline.

Question 24

Production Life Cycle Curve Shape

Answer 24

Check Notes

Question 25

Production Life Cycle Curve Relation to Same Product’s Consumption Curve

Question 26

Why are Products Produced in Developed Countries Early in their life cycles and in underdeveloped countries during the end of their life cycle?

Answer 26

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.

Question 27

Product Life Cycle Theory

Answer 27

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.

Question 28

Factor Price Equalization. What is it? What happens to prices of factors of production? Who wins short-term? Who wins long-term?

Answer 28

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.

Question 29

Specific Factors Theorem

Answer 29

In the short run, the industry with the CA wins as price of good increase

Question 30

Stolper-Samuelson Theorem

Answer 30

In the long run, the input used intensively in the good with the CA wins as the price of
the input increases

Question 31

Hecksher-Ohlin (Factor Endowment) Model

Answer 31

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.

Question 32

David Ricardo

Answer 32

Comparative Advantage and Ricardian/Classical Model

Question 33

Classical Model

Answer 33

2 goods, 2 countries, and 1 factor of production.
Straight PPF curve; constant opportunity costs.

Question 34

Adam Smith

Answer 34

Wealth of Nations, Absolute Advantage, and Trade as a positive sum game.

Question 35

Mercantilism

Answer 35

Trade is a zero sum game. Countries should push exports and accumulated gold.

Question 36

PPF/PPC

Answer 36

A curve that shows the possible production combinations of two goods from one country.