Chapter 6 Flashcards
FITB: Cross-Border Trade Trends
a) Dramatic ___ over the past 70 years in the amount of international trade
b) Recent ___ of value in traded services
c) Shift from free trade toward ___ trade
a) growth
b) acceleration
c) managed
what are 2 gains from trade?
- Specialize in production (and export) of goods and services produced efficiently
- Importing goods and services produced inefficiently
What is free trade?
There are several theories: government doesn’t influence trade through quotas or duties
Match the person to the theory: Adam Smith, Heckscher-Ohlin, David Ricardo, Vernon, Krugman
a) Theory of comparative advantage
b) New trade theory -first mover advantage
c) Product life-cycle theory - production location changes as products become widely accepted
d) Theory of absolute advantage
e) Factors of production theory
a) David Ricardo
b) Krugman
c) Vernon
d) Adam Smith
e) Heckscher-Ohlin
What do the theories of Smith, Ricardo and Hecksher-Ohlin tell us?
Allows specialization. A country’ economy may gain if its citizens buy certain products from other nations that could be produced at home. The gains arise because international trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries.
What is the argument for unrestricted free trade? Whose theories form part of the case for it?
The theories of Smith, Ricardo, and Heckscher-Ohlin.
Both import controls and export incentives (such as subsidies) are self-defeating and result in wasted resources.
Is mercantilism dead?
No: neo-mercantilists equate political power with economic power and economic power with a balance-of-trade surplus
What does mercantilism encourage?
Promoting exports and limiting imports. Trade is a zero-sum game
FITB: Mercantilism
a) It’s in a country’s best interest to maintain a ___ ___
b) Advocates government intervention to achieve a ___ in the balance of trade
c) Flaw is that it views trade as a ___-___ ___
a) Trade surplus
b) Surplus
c) Zero-Sum Game
Whose theory promoted absolute advantage?
Adam Smith in The Wealth of Nations
FITB Absolute advantage:
a) Absolute advantage when producing a product more ___
b) ____ in production of goods absolute advantage
c) Trade ___ goods for other goods
d) ____ countries benefit from specialization and trade
a) efficiently
b) Specialize
c) speciality
d) Both
Whose theory promoted comparative advantage?
David Ricardo in the Principles of Political Economy
FITB: Comparative advantage
a) Potential world production is ___ with unrestricted free trade
b) The theory of comparative advantage suggests trade is a ___-___ ___
c) Consumers in all nations can consume ___ if there are no restrictions on trade.
d) T/F: Countries that lack an absolute advantage in the production of any good cannot benefit from free trade.
a) greater
b) positive-sum game
c) more
d) False
What are the assumptions and qualifications of the comparative advantage theory?
- Simple world with 2 countries and 2 goods
- No transportation costs
- No differences in price of resources
- Resources can move freely
- Constant returns to scale
- Each country has a fixed stock of resources and free trade does not change the efficiency with which a country uses its resources
- No effects on trade on income distribution within a country
What does the extension to the ricardian model say?
Resources are immobile. There are diminishing returns. Dynamic effects and economic growth. Trade, jobs, and wages: Samuelson critique. Evidence for link between trade and growth.
