Chapter 3 Terminology

Question 1

Mercantilism

Answer 1

is economic nationalism for the purpose of building a wealthy and powerful state. Accordingly, Mercantilist economic policy has the following objectives:
− Promotion of exports while hindering imports
− No loans abroad, since monetary values or gold
must be located a home to increase the welfare there.

Question 2

Absolute Advantage (Adam Smith, 1776)

Answer 2

In free trade, each country should specialise in the production of goods in which it has an absolute (cost) advantage or can produce more efficiently and import other goods in which it has an absolute (cost) disadvantage. This leads to an international division of
labor and an increase in overall production, from which all countries benefit equally.

Question 3

Comparative (cost) Advantage (David Ricardo, 1817)

Answer 3

Even if there is an absolute (cost) disadvantage of a country in the production of both goods, international division of labor and free trade are advantageous.
The weaker country specializes in the good where it has the smaller (cost) disadvantage and imports the other good because it has a relative or comparative (cost) advantage over the other country.

Question 4

Inter-sectoral trade

Answer 4

trade of goods or services that come from different sectors of the economy. Trade between industrial and less-developed countries; Barter trades - trade goods against goods

Question 5

Factor-Proportion Model (Heckscher, 1919 and Ohlin, 1933)

Answer 5

a general equilibrium mathematical model of international trade, it builds on David Ricardo’s theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries export products that use their abundant and cheap factors of production, and import products that use the countries’ scarce factors.

Question 6

Autarky “Solution”

Answer 6

Autarky, an economic system of self-sufficiency and limited trade. A country is said to be in a complete state of autarky if it has a closed economy, which means that it does not engage in international trade with any other country. Historically, societies have utilized different levels of autarky.

Question 7

Inter-industry trade

Answer 7

trade of goods and services that belong to different industries. Trade between industrial and developing countries; Offshoring of labor-intensive manufacturing

Question 8

The Leontief Paradoxon (Leontief, 1953)

Answer 8

He attempted to test the Factor Proportions Theory empirically. He made use of input-output tables
related to the U.S. economy from 1947. He took only two factors of production— labour and capital. He found out that import replacement industries
in the U.S. had been employing 30 percent more of capital than the export industries. The capital-labour ratio was higher in the import-replacement industries than the export industries. It suggested that the U.S. exports, generally recognised as the capital-abundant country, were in fact labour-intensive. More generally, the Leontief Paradox is that a country with a higher capital per worker has a lower capital/labor ratio in exports than in imports.

Question 9

Neoclassical theory (or model) of trade

Answer 9

The neoclassical model of trade argues that the production possibilities curve is convex, or that the opportunity cost of producing a good increases as production of the goods increase.