Chapter 5 Flashcards
What is the theory of comparative advantage?
It is one of the foundations of trade theory, though it has a mixed record explaining trade patterns.
What are the three types of industries we have?
Agriculture
Manufacturing
Services
What is intraindustry trade?
Intraindustry trade refers to exports and imports of the same products.
What is interindustry trade?
Interindustry trade refers to exports and imports of different products.
What is an example of intraindustry trade?
The U.S. exports aircraft to the European Union and imports aircraft from them as well.
What characterizes intraindustry trade?
It is common between high-income, advanced economies.
What factors influence the measured importance of intraindustry trade?
It depends on how broadly we define an industry.
What encourages intraindustry trade?
Internal economies of scale in production.
What is the New Trade Theory?
Developed in the 1970s and 1980s, it includes models of trade based on economies of scale, both internal and external.
Tech increases through trade and IIT increases.
What are internal economies of scale?
As a firm increases in size, its average cost of production falls.
What are external economies of scale?
As an industry grows in size, the average cost of production falls for individual firms.
What are the gains from intraindustry trade?
Lower costs and prices, increased variety in the market, and opportunities for domestic firms to expand.
What is a case study example of intraindustry trade?
Between the U.S. and Canada in 2019, with vehicles and vehicle parts being the largest traded items.
What do firms generally want regarding transportation costs?
Firms want to locate near their markets to reduce transportation costs.
What is the significance of Mexico’s changing economic geography?
From the 1930s to the 1980s, Mexico focused on manufacturing for its national market, leading to significant growth in cities like Mexico City.
What are the drivers of external economies of scale?
Pooling of labor markets for specialized skills, pooling of input markets for specialized inputs, and knowledge spillovers between firms.
What is a potential downside of trade with external economies of scale?
It may create losses in some cases, as seen when the U.S. gains skills in widget production while other countries take time to accumulate skills.
What are industrial policies?
They are used by governments to support the development of a particular industry.
What is the rationale for industrial policies?
Markets sometimes do not provide an optimal quantity of a good or service due to divergences between private and social returns.
What are externalities in the context of industrial policies?
Externalities occur when some costs or benefits are not included in market transactions, leading to market failures.
What happens when social returns are less than private returns?
Markets produce too little at a high cost.
What are knowledge spillovers?
A new product generates benefits for the producer (profits) and for others (the new knowledge that can be used in other areas).
Example: personal computers.
What are coordination problems in industrial policies?
For two products to be successful, they both have to be created at the same time.
Example: Electric cars and plug-in stations.
What are capital market imperfections?
A lack of information by banks and financial firms keeps financing out of the hands of people with profitable ideas.
