Chapter 5 Flashcards
Exporting:
Selling abroad
Importing:
Buying from abroad
Trade in goods (merchandise trade):
Sale of physical goods across national borders
Trade in service:
Sale of intangibles across national borders
Trade deficit:
An economic condition in which a nation imports more than it exports
Trade surplus:
An economic condition in which a nation exports more than it imports
Balance of trade:
The aggregation of importing and exporting that leads to the country-level trade
surplus or deficit
Classic trade theories:
The major theories of international trade advanced before mid-20th
century; mercantilism, absolute advantage, comparative advantage and factor endowments
Modern trade theories:
The major theories of international trade advanced in the second half of
the 20th century: product life cycle, strategic trade and national competitive advantage
Theory of mercantilism:
A theory that holds that the wealth of the world (measured in gold and
silver) is fixed and that a nation that exports more and imports less would enjoy the net inflows of
gold and silver thus become Richter
Free trade:
Trade unheated by trade barriers
Theory of absolute advantage:
A theory that suggests that under fire trade, each nation gains by
specialising in economic activities in which it has absolute advantage
Absolute advantage:
The economic advantage one nations enjoys due to higher productivity in an
economic activity
The theory of comparative advantage:
A theory that focuses on the relative (not absolute)
advantage in one economic activity that one nation enjoys in comparison with other nations
Comparative advantage:
Relative (not absolute) advantage in one economic activity that one
nation enjoys in comparison with other nations
Opportunity cost:
Given the alternatives (opportunities), the cost of pursuing one activity at the
expense of another activity
Resource (factor) endowments:
The extent to which different countries possess various resources
(factors), such as labour, land and technology
Factor endowment theory (or Heckscher-Ohlin theory):
A theory that suggests nations will develop
comparative advantage based on their locally abundant factors
Product life cycle theory:
A theory that accounts for changes in patterns of trade over time by
focusing on product life cycles
- Innovations originate in the US
- Products follow a three stage path
1) New Product Stage
2) Maturing Product Stage
3) Standardized Product Stage
- Production gradually shifts from developed to developing countries
Strategic trade theory:
A theory that suggests that strategic intervention by governments in
certain industries can enhance their odds for international success
First mover advantage:
Advantages that first entrants enjoy and don’t share with late entrants
Strategic trade policies:
Government subsidies inspired by strategic trade theory
Theory of national competitive advantage of industries (or ‘diamond’ model):
A theory that suggests that the competitive advantage of certain industries in different nations depends off four aspects that form a ‘diamond’
1) Factor Conditions
2) Demand Conditions
3) Related and Supporting Industries
4) Firm Strategy, Structure, and Rivalry
Michel Porter: National competitive advantage is created through opportunities and pressures created by:
- resource endowments in terms of natural and Human Resources
- sophistication and scale of domestic demand
- strategies, structure and rivalry of domestic competitors
- availability of related and supporting industries
Resource mobility:
The ability to move resources from one part of a business to another
Transportation costs:
The costs incurred moving products from one country to another
Protectionism:
Government policies designed to protect a domestic industry from foreign
competition
Import tariff:
A tax imposed on imports
Deadweight loss:
Net losses that occur in an economy as the result of tariffs
Deadweight loss = Loss to consumer − Gains to farmers − Tariff revenues to government
Non-tariff barriers (NTBs):
Government policies designed to protect a domestic industry from
foreign competition
Subsidies:
Government payments to (domestic) firms
Import quotas:
Restrictions on the quantity of imports
Anti-dumping duties:
Cost levied on imports that have been ‘dumped’ (selling below cost to
‘unfairly’ drive domestic firms out of business)
Public procurement:
Units of government buying products or services
Local content requirements:
A requirement that value added is created locally
Infant industry argument:
The argument that temporary protection of young industry may help
them to attain international competitiveness in the long run
Trade embargoes:
Politically motivated trade sanctions against foreign countries to signal
displeasure
Big trading countries of international trade
- The USA and China are the biggest exporters and importers of goods.
Appreciate how economic and political institutions influence international trade
- The net impact of various tariffs and NTBs is that the whole nation is worse off while certain
special interest groups (such as certain industries, firms and regions) benefit. - Economic arguments against free trade centre on (1) protection from ‘unfair’ competition, (2)
infant industries and (3) unequal distribution of cost and benefits. - Political arguments against free trade focus on (1) national security, (2) consumer protection,
(3) foreign policy and (4) environmental and social responsibility.
