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SGMT 2200 > Chapter 5 Terms - International trade > Flashcards

Chapter 5 Terms - International trade Flashcards

1
Q

Export:

A

Selling abroad

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2
Q

Import:

A

Buying from abroad

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3
Q

Merchandise (goods):

A

Tangible products being traded

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4
Q

Service:

A

Intangible services being traded

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5
Q

Trade deficit:

A

An economic condition in which a nation imports more than it exports

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6
Q

Trade surplus:

A

An economic condition in which a nation exports more than it imports

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7
Q

Balance of trade:

A

The aggregation of importing and exporting that leads to the country-level trade surplus or deficit

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8
Q

World Merchandise Trade Volume, 2015Q1–2022Q4 (2015Q1 = 100)

A

Steady Increase from 2015 to 2024 with a steep decline in 2020 due to COVID 19

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9
Q

Why Do Nations Trade?

A

There are economic gains from trade.

International trade must be win–win: both sides must share economic gains.

Both sides must have economic gains

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10
Q

Why Do Nations Trade? RBV View

A
  • Firms in one nation generate exports that are valuable, unique, and hard to imitate

–> Beneficial for foreign firms to import

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11
Q

Why Do Nations Trade? IBV View

A
  • Different rules governing trade are designed to determine how gains are shared or not shared
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12
Q

Top 5 Exporting Nations in 2019

A
  1. China
  2. US
  3. Germany
  4. Netherlands
  5. Japan
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13
Q

Theories of International Trade

A

Classical trade theories & Modern trade theories

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14
Q

Classical trade theories:

A

The major theories of international trade that were advanced before the 20th century, which consist of (1) mercantilism, (2) absolute advantage, and (3) comparative advantage

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15
Q

Modern trade theories:

A

The major theories of international trade that were advanced in the 20th century, which consist of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage of industries

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16
Q

Theory of Mercantilism:

A

A theory that suggests that the wealth of the world is fixed

Nation that exports more than it imports will enjoy the net inflows and become richer

Intellectual ancestor of modern-day protectionism

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17
Q

Protectionism:

A

Idea that governments should actively protect domestic industries from imports and promote exports

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18
Q

Absolute Advantage (6)

A

Advocated by Adam Smith: the “invisible hand” of markets
–> Free trade: Free market forces should determine the buying and selling of goods and services

There is little or no government intervention
Under free trade, each nation gains by specializing in economic activities in which it is the most efficient (absolute terms) producer

Absolute advantage: rare

Reality: production of similar products by many countries

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19
Q

Free trade:

A

The idea that free market forces should determine how much to trade with little or no government intervention

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20
Q

Theory of absolute advantage:

A

A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage

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21
Q

Absolute advantage:

A

The economic advantage one nation enjoys that is absolutely superior to other nations

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22
Q

Comparative Advantage (Details 6)

A

Developed by David Ricardo

A nation gains by specializing in production of one good in which it has comparative advantage

–> Comparative advantage: Relative advantage in one economic activity that one nation enjoys in comparison with other nations

Net gains are availed through trade

Opportunity cost: Cost of pursuing one activity at the expense of another activity

Counterintuitive–> Realistic and useful during application

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23
Q

Opportunity cost:

A

Cost of pursuing one activity at the expense of another activity

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24
Q

Comparative advantage: definition

A

Relative advantage in one economic activity that one nation enjoys in comparison with other nations

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25
Q

Sources of Advantage

A

Absolute and comparative advantages arise from:
1. Productivity
- Absolute advantage deals with productivity differences
- Comparative advantage emphasizes relative productivity differences

  1. Factor endowment: Extent to which different countries possess various factors of production (labor, land, and technology)
    –> Factor endowment theory: Nations will develop comparative advantages based on locally abundant factors
26
Q

Factor endowment:

A

Extent to which different countries possess various factors of production (labor, land, and technology)

27
Q

Factor endowment theory:

A

Nations will develop comparative advantages based on locally abundant factors

28
Q

Product Life Cycle (5)

A

Developed by Raymond Vernon in 1960s

Dynamic theory

Divided the world into three categories
–> Lead innovation nation, developed nations, and developing nations

Divided each product into three life cycle stages
–> New, maturing, and standardized

Criticism of product life cycle theory

29
Q

Product Life Cycle divided into 3 Categories

A

Lead innovation nation
developed nations, and
developing nations

30
Q

Product Life Cycle divided into three life cycle stages:

A

New,
maturing, and
standardized

31
Q

Product life cycle theory:

A

A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles

32
Q

Strategic trade theory:

A

A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success

33
Q

Strategic trade policy:

A

Government policy that provides companies a strategic advantage in international trade through subsidies and other supports

34
Q

Strategic Trade:(3)

A

Strategic government intervention in certain industries enhance their odds for international success

Industry characteristics

Strategic trade policy: Provides companies a strategic advantage through government subsidies

35
Q

Strategic Trade Criticism

A

Scholars and policy makers are uncomfortable with government intervention (against free trade)

Industries claim they are strategically important

36
Q

National Competitive Advantage

A

Proposed by Michael Porter
The basic question in this theory:

–> Why certain industries (but not other industries) within a nation are competitive internationally?
Or
–> Why does a nation become the home base for successful international competitors in certain industries?

37
Q

Theory of national competitive advantage of industries (“diamond” theory): (The Porter Diamond)

A

A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond”

38
Q

The 4 aspects of the Diamond

A
  1. Firm Strategy, structure and rivalry
  2. Domestic Demand Conditions
  3. Related and supporting industries
  4. Country Factor Endowments
39
Q

Summary of: Mercantilism (Colbert 1600s-1700s)

A

Main points:
–> International trade is a zero-sum game- –> trade deficit is dangerous.
–> Governments should protect domestic industries and promote exports.

Strengths and influences:
–> Forerunner of modern-day protectionism

Weaknesses and debates:
–> Inefficient allocation of resources.
–> Reduces the wealth of the nation in the long run.

40
Q

Summary of: Absolute Advantage (Smith, 1776)

A

Main Points:
–> Nations should specialize in economic activities in which they have an absolute advantage and trade with others.
–> By specializing and trading, each nation produces more and consumes more.
–> The wealth of all trading nations, and the world, increases.

Strengths and influences:
–> Birth of modern economics. *
–> Forerunner of the free trade movement
–> Defeats mercantilism at least intellectually

Weaknesses and debates:
–> When one nation is absolutely inferior to another, the theory is unable to provide any advice
–> When there are many nations, it may be difficult to find an absolute advantage.

41
Q

Summary of: Comparative Advantage (Ricardo 1817; Heckscher 1919; Ohlin 1933)

A

Main points:
–> Nations should specialize in economic activities in which they have a comparative advantage and trade with others.
–> Even if one nation is absolutely inferior to another, the two nations can still gainfully trade.
–> Factor endowments underpin comparative advantage.

Strengths and influences:
–> More realistic guidance to nations (and their firms) interested in trade but having no absolute advantage.
–> Explains patterns of trade based on factor endowments.

Weaknesses and debates:
–> Relatively static, assuming that comparative advantage and factor endowments do not change over time.

42
Q

Summary of: Product Life Cycle (Vernon 1966)

A

Main points:
–>Comparative advantage first resides in the lead innovation nation, which exports to other nations.
–> Production migrates to other advanced nations and then developing nations in different product life cycle stages.

Strengths and influences:
–> First theory to incorporate dynamic changes in patterns of trade.
–> More realistic with trade in industrial products in the 20th century.

Weaknesses and debates:
–>The United States may not always be the lead innovation nation.
–> Many new products are now launched simultaneously around the world

43
Q

Summary of: Strategic Trade (Bander, Spencer, Krugman, 1980s)

A

Main points:
–> Strategic intervention by governments may help domestic firms reap first-mover advantages in certain industries.
–> First-mover firms, aided by governments, may have better odds at winning internationally.

Strengths and influences:
–> More realistic and positively incorporates the role of governments in trade.
–> Provides direct policy advice.

Weaknesses and debates:
–> Ideological resistance from many “free trade” scholars and policy makers.
–> Invites all kinds of industries to claim they are strategic.

44
Q

Summary of: National Competitive advantage of industries (Porter 1990)

A

Main points:
–> Competitive advantage of different industries in different nations depends on the four interacting aspects of a “diamond.”
–> The “diamond” consists of (1) factor endowments; (2) domestic demand; (3) firm strategy, structure, and rivalry; and (4) related and supporting industries.

Strengths and influences:
–> Most recent, most complex, and most realistic among various theories.
–> As a multilevel theory, it directly connects firms, industries, and nations.

Weaknesses and debates:
–> Has not been comprehensively tested.
–> Overseas (not only domestic) demand may stimulate the competitiveness of certain industries.

45
Q

Theories of International Trade Summary:

A

The classical pro–free trade theories seem common sense today. However, they were revolutionary 200 years ago, when the world was dominated by mercantilistic thinking.

Classical theories rely on highly simplistic assumptions of a model consisting of only two nations and two goods.

The theories assume perfect resource mobility—the assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry.

Classical theories assume no foreign exchange complications and zero transportation costs.

46
Q

perfect resource mobility

A

the assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry.

47
Q

Realities of International Trade

A

Trade war:
Tariff barrier:
Import tariff:
Nontariff barrier (NTB):
Subsidies:
Import quota:
Voluntary export restraints (VER):
Local content requirement:
Administrative policy:
Antidumping duty:
Export control:

48
Q

Trade war:

A

Economic conflict resulting from extreme protectionism in which nations raise or create tariffs or other trade barriers against each other

49
Q

Tariff barrier:

A

Trade barrier that relies on tariffs to discourage imports

50
Q

Import tariff:

A

A tax imposed on imports

51
Q

Nontariff barrier (NTB):

A

Trade barriers that rely on nontariff means to discourage imports
To reduce imports: (1) subsidy, (2) import quota, (3) export restraint, (4) local content requirement, (5)administrative policy, and (6) antidumping duty

52
Q

Subsidies:

A

Government payments to domestic firms

53
Q

Import quota:

A

Restrictions on the quantity of imports

54
Q

Voluntary export restraints (VER):

A

International agreement that shows that exporting nations voluntarily agree to restrict their exports

55
Q

Local content requirement:

A

Requirement stipulating that a certain proportion of the value of the goods made in one nation (or region) must originate from that nation (or region)

56
Q

Administrative policy:

A

Bureaucratic rules that make it harder to import foreign goods

57
Q

Antidumping duty:

A

Tariff levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business)

58
Q

Export control:

A

Export prohibition and restriction

59
Q

Prominent economic arguments against free trade are: (2)

A

The need to protect domestic industries, firms, and jobs from “unfair” foreign competition—in short, protectionism

The necessity to shield infant industries (Infant industry argument: The argument that if domestic firms are as young as “infants,” in the absence of government intervention, they stand no chance of surviving and will be crushed by mature foreign rivals)

60
Q

Political arguments against free trade advance a nation’s political, social, and environmental agenda, regardless of possible economic gains from trade, and include:

A

Geopolitical competition

National security

Consumer protection

Foreign policy (Trade embargo: Politically motivated trade sanction against foreign countries to signal displeasure)

Environmental and social responsibility

61
Q

Trade embargo:

A

Politically motivated trade sanction against foreign countries to signal displeasure

62
Q

Implications for Action - MGMT Savy

A
  1. Discover & leverage comparative advantage of world -class locations
  2. Monitor and nurture the current comparative advantage of certain locations, and take advantage of new locations
  3. Be politically active to demonstrate, safeguard, and advance the gains from trade and pay attention to the pains from trade

SGMT 2200 (10 decks)

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