chapter 1 Flashcards
what is trade?
the VOLUNTARY exchange of goods, services, assets or money between one person or organization and another
what is international trade?
trade between residents of two countries (crossing boarders)
why does international trade occur?
- higher quality
- less expensive products
- more quantity
what are the two types of international trade theories?
early country based theories and modern firm based theories
what are early country based theories?
before world war 2, focus on the individual country, trading in commodities, interindustry trading
what is trading in commodities? (early country based theories)
quality is the same, all we care about is lowest price. Ex: any metals, gas, oil, staple foods
what are modern firm based theories?
emerged after world war 2, focuses on International trade, differentiated goods, intraindustry
what are differentiated goods (modern firm based theories)
for the price (ex: apple products), reliable, popularity, reputation, good value. It’s not cheap but you get it for reasons other than lowest price
interindustry vs intrainindustry?
- Inter industry trade: trading one type of good for another
- Intra industry trade: ex: laptops for laptops, cars for cars
what is mercantilism (early country based theories)?
philosophy that says that a country’s wealth is measured by its gold and silver, focuses a lot on exports, want ton make everything from our country, gvt gains from this theory, exporters lose out
what is absolute advantage?
when a country, individual, or entity can produce a particular good or service with fewer resources (such as time, labor, or materials) than another country, individual, or entity, productivity per hour, pure specialization
what is a risk of absolute advantage
the economy becomes too reliable on one good or service, resource shortage,
what is comparative advantage?
Even though you are better than me at everything, focus on what you are RELATIVELY better at and we will trade, focuses on OPPORTUNITY COST, also producivbity per hpur
what is the relative factor endowments theory (heckshcer ohlin theory)
a country will have a comparative advantage in producing products that use abundant resources, not really looking at productivity, ome countries are relatively capital-abundant, while others are labor-abundant.
what is the Leontief paradox?
the USA was a capital abundant country but was using labour abundance to export which goes against the relative factor n endowments theory
what is linders country similarity theory? (modern firm based theory)
Looking Per capita income of each country, if you look at both and gthey are similar you can trade, intraindustry trade, differentiated goods
what is the new trade theory (MODERN firm based theory)
focuses on intrainindustry trading, economies of scale, bring down boarders
what is economies of scale?
producing more–> cost of producing the service decreases
what are the two types of international investments?
foreign portfolio investments (FPI) and foreign direct investments (FDI)
what is FPI?
a passive investment, dont make decisions, lending money, shorter term ibvestemnets, dont have control
what is fdi?
you make decisions, investors directly invest, long term investments
what are the two political factors affecting FDI?
1)avoidance of trade barriers (dont have trade barriers so that foreign investors are more appealed to do business)
2) economic development incentives (gvt may offer incentives ti encourage FDI in their country)
what is protectionism?
protecting certain parts of our economy
what are the two effects that protectionism could have?
- impact on Foreign Producers: These policies can affect the ability of foreign producers to compete in the domestic market of the country where protectionism is practiced. This is often achieved through measures like tariffs, quotas, or trade barriers.
- Impact on International Trade: Protectionist policies can also influence a company’s ability to engage in international trade. They can either limit or enhance a company’s capacity to sell abroad or acquire necessary foreign supplies
why do governments employ protectionist measures?
Governments employ protectionist measures with the aim of achieving various economic, social, and political goals
policymakers involved in shaping protectionist policies face what challenges
conflicting objectives and pressure from interest groups. These factors can complicate the decision-making process regarding trade policies.
what is the role of stakeholders?
they are invested in what you are doing (ex: workers, suppliers, owners, politicians)
what are the effects of trade restriction?
brings losers and winners among countries, companies and workers
when consumers gain for free trade, who loses out?
companies and workers
what are the four main economic rationales on why governments intervene in trade
fighting unemployment, protecting infant industries, developing an industrial base and economic relationships with other countries
when putting restrictions on imports to create jobs, what can occur ? (fighting unemployment )
- lead to retaliation by other countries aka trade wars
- are less likely retaliated against effectively by small countries
- are less likely to be met with retaliation if implemented by small economies
- may decrease export jobs because of price increases
- may decrease export jobs because of lower incomes abroad
what is the infant industry argument
gvt should shield an emerging industry from foreign competition by giving it a large share of the domestic market until it can compete on its own
the infant industry argument says that production becomes more competitive over time because of what?
- increased economies of scale (when you produce more of something, cost of producing each unit decreases )
- greater worker efficiency
because of infant industries, what do countries use ?
protectionist policies
how does the gvt decide which countries get chosen for the infant industry argument?
they have to have a High probability of success
Countries that are trying to develop an industrial base may intervene in what?
trade flows
why do countries promote industrialization? (developing an industrial base)
brings faster growth than agriculture
- brings in investment funds
- diversifies the economy
- creates growth in manufactured goods
- reduces imports and promotes exports
Puts tariffs to be the best (about AE)
what could be some of the issues shifting from agriculture to more industralizaton? (developing an industrial base)
- may be too diffficult of a transition
- could be too big of a shift
- there were a lot of opportunities in factories for unskilled workers but this has changed. technology has replaced unskilled workers and now education is really emphasized
why are trade controls used? (economic relationships with other countries )
to improve the balance of payments
to gain fair access to foreign markets (comparable access argument)
as a bargaining tool (believability and importance)
to control prices (dumping, optimum-tariff theory)
what is the comparable access argument?
companies that have access to similar resources, information, or markets should be subject to similar regulations or competitive conditions.
if prices get too high? (economic relations with other countries )
it could result in smuggling or substitution
if prices get too low? (Economic Relationships With Other Countries)
there is an incentive to produce less or to shift foreign production and sales
what is dumping?
I made too Many of a product so I will sell them to another place for super cheap. However its unfair practice for the country being dumped on
what is the optimum Tarif theory?
an economic concept that suggests a government should impose tariffs (taxes on imports) in order to maximize its own economic welfare.
according to the optimum tariff theory, what will a foreign producer do
will lower its prices if the importing company places a tax on its products.
what is the essential industry argument?
protect essential industries so the country is not dependent on
foreign supplies
in order to use the essential industry argument, what should the gvt do?
– determine which industries are essential
– consider costs and alternatives
– consider political consequences
for promoting accetibale practices abroad, what does tis mean
trade limitations could be used to compel a foreign country to amend to an object able practice, pressuring goveremts to change their views on different issues like human rights or the environment
what is the non economic rationale of maintaining or extending spheres of influence?
Governments provide assistance and encourage imports from
countries that join a political alliance or vote a preferred way
within international bodies
could coerce gvt or punish
what is preserving national culture
helping to sustain an identity that sets the country apart, limiting exports of historical items that are apart of the culture, limiting foreign products
what are the two types of trade control?
- those that indirectly affect the amount traded by directly influencing price
- those that directly limit the amount of good that can be traded
what are tariffs?
refer to a government levied tax on goods shipped internationally
what are tariffs put on?
goods entering, leaving or passing through a country
for protection or revenue
on a per unit or a value basis
what are the different types of tariffs
specific duty: set dollar amount
ad valorem tariff: percentage
a command duty: both a set dollar and percentage
what are subsidies?
Direct assistance to companies to make them more competitive – one of the most common ways to influence price
what are other direct influencers of price
aid and loans
what are the two types of aids and loans
tied (in the contract) and untied (not part of the contract)
what are quotas?
limit the quantity of a product that can be exported or imported
what are the two types of quotas?
- voluntary export restraint (dont have a contract between countries but I voluntarily agree to limit the amount of goods I ship to you)
- embargoes ( full stop, none can come in none can Come out)
what are other direct mquantity limiters
buy local
standards and labels
specific permission requirements
administrative delays
what is the world trade organization
A really Important org for interantomal trade when where you become a member you agree to abide by a set of rules for international trade. Helpful for countries because it creates standardization for trade, can settle trade problems
