CH19 - The Gains from International Trade Flashcards
What is international trade?
exchange of goods and services that takes place across international boundaries
When did volume of global trade decline?
- 2009 ,financial crisis
- 2020, COVID-19 pandemic
What determines opportunity costs in trade?
Natural endowments
Public policy
Historical accident
What is an open economy
Economy engaging in international trade
What is a closed economy?
Economy that has no foreign trade
What is a synonym for a closed economy?
Autarky
What are the gains from trade?
Increased output attributable to the specialization that is made possible by trade
(assumption: production costs are constant)
What three kinds of trade exists?
Interpersonal, interregional, international
What is an absolute advantage in trade?
when one country can produce some commodity at lower absolute cost than another country
What are reasons for countries to have the best absolute advantage on the production of a good?
Access to cheap natural resources, low-cost labour, sophisticated capital equipment
What is a comparative advantage?
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.
What is the formula for opportunity costs?
OC = (what I sacrifice) / (what i gain)
What type of patterns do gains from specialization and trade depend on?
They depend on patterns of comparative advantage, aka those w lower opportunity costs comparatively
How can trade increase world output?
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
What does the slope of a PPB (production possibilities boundaries) represent?
Opportunity cost
How can gains from trade with variable costs be made in economies of scale?
- 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.
What is intra-industry trade?
Countries specialise in different versions of similar products, and then trade w one another
What is learning-by-doing?
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
How is Learning-by-doing and economies of scale represented on an LRAC curve?
Movement to minimum of curve + overall shift downwards
What is the Hecksher-Ohlin theory?
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.
What are 4 sources of comparative advantage?
- Different factors of endowment
- Different climates
- Human capital = acquired skills
- Acquired comparative advantage (must innovate), dunamic
What does the Law of One Price state?
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.
When do you export, when do you import a product?
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)
What are the 3 Implications for international trade in presence of integrated global supply chance
- Countries have specific productive activities that take place along the global supply chain
- Comparative adv often arent long-lasting due to changes in econ env/technology
- Traditional data on Int Trade doesnt capture extent of integration in global supply chains
What are terms of trade?
ratio of the average price of a country’s exports to the average price of it products
What is the formula for terms of trade
(index Pexport / index Pimport) x 100
what are the consequences of a rise in a country’s terms of trade?
A rise in a country’s terms of trade is beneficial because it expands the country’s consumption possibilities.
