CH19 - The Gains from International Trade

Question 1

What is international trade?

Answer 1

exchange of goods and services that takes place across international boundaries

Question 2

When did volume of global trade decline?

Answer 2

1. 2009 ,financial crisis
2. 2020, COVID-19 pandemic

Question 3

What determines opportunity costs in trade?

Answer 3

Natural endowments
Public policy
Historical accident

Question 4

What is an open economy

Answer 4

Economy engaging in international trade

Question 5

What is a closed economy?

Answer 5

Economy that has no foreign trade

Question 6

What is a synonym for a closed economy?

Answer 6

Autarky

Question 7

What are the gains from trade?

Answer 7

Increased output attributable to the specialization that is made possible by trade
(assumption: production costs are constant)

Question 8

What three kinds of trade exists?

Answer 8

Interpersonal, interregional, international

Question 9

What is an absolute advantage in trade?

Answer 9

when one country can produce some commodity at lower absolute cost than another country

Question 10

What are reasons for countries to have the best absolute advantage on the production of a good?

Answer 10

Access to cheap natural resources, low-cost labour, sophisticated capital equipment

Question 11

What is a comparative advantage?

Answer 11

when a country can produce a good w less forgone output of other goods than can another country - differences in opportunity cost between countries. These patterns are based on opportunity cost.

Question 12

What is the formula for opportunity costs?

Answer 12

OC = (what I sacrifice) / (what i gain)

Question 13

What type of patterns do gains from specialization and trade depend on?

Answer 13

They depend on patterns of comparative advantage, aka those w lower opportunity costs comparatively

Question 14

How can trade increase world output?

Answer 14

World output increases if countries specialize in the production of the goods in which they have a comparative advantage - there is a redistribution of unchanged amount of resources within a country, increasing productivity

Question 15

What does the slope of a PPB (production possibilities boundaries) represent?

Answer 15

Opportunity cost

Question 16

How can gains from trade with variable costs be made in economies of scale?

Answer 16

• In industries with significant scale economies, small
  countries that do not trade will have low levels of output
  and high costs.
  – With international trade, small countries can produce
  for the large global market and produce at lower costs.
  – International trade allows small countries to reap the
  benefits of scale economies.

Question 17

What is intra-industry trade?

Answer 17

Countries specialise in different versions of similar products, and then trade w one another

Question 18

What is learning-by-doing?

Answer 18

Reduction in unit costs that often results as workers learn through repeatedly performing the same tasks
Specialisation can lead to gains from trade through scale economies, learning by doing or both

Question 19

How is Learning-by-doing and economies of scale represented on an LRAC curve?

Answer 19

Movement to minimum of curve + overall shift downwards

Question 20

What is the Hecksher-Ohlin theory?

Answer 20

countries have comparative advantages in the production of goods that intensively use the factors of production with which they are abundantly endowed

EX: Canada has a comparative advantage in goods that use forest products intensively, ie paper, framing materialsm, … Relatively to most other countries, CA is sparsely endowed with labour. Thus, CA has a comparative disadvantage in goods that use labour intensively, such as linen or many other textile products.

Question 21

What are 4 sources of comparative advantage?

Answer 21

1. Different factors of endowment
2. Different climates
3. Human capital = acquired skills
4. Acquired comparative advantage (must innovate), dunamic

Question 22

What does the Law of One Price state?

Answer 22

The law of one price states that when a product is traded internationally, the prices in various countries (net of any specific taxes or tariffs) will differ by no more than the cost of transporting the product between countries. Aside from differences caused by these transport costs, there is a single world price.

Question 23

When do you export, when do you import a product?

Answer 23

Happens when excess supply domestically at world price - that excess will be exported (pw>pd)
(under S/D curves)

Countries import the goods for which they are high-cost producers = import goods for which they have a comparative disadvantage.
(over SD curves)

Question 24

What are the 3 Implications for international trade in presence of integrated global supply chance

Answer 24

1. Countries have specific productive activities that take place along the global supply chain
2. Comparative adv often arent long-lasting due to changes in econ env/technology
3. Traditional data on Int Trade doesnt capture extent of integration in global supply chains

Question 25

What are terms of trade?

Answer 25

ratio of the average price of a country’s exports to the average price of it products

Question 26

What is the formula for terms of trade

Answer 26

(index Pexport / index Pimport) x 100

Question 27

what are the consequences of a rise in a country’s terms of trade?

Answer 27

A rise in a country’s terms of trade is beneficial because it expands the country’s consumption possibilities.