Course Questions Flashcards
Do countries export only those goods for which they have an absolute advantage in production?
In the Ricardian model, the gains of trade depend on comparative rather than absolute advantage. Having an absolute advantage in productivity over other countries is neither a sufficient nor necessary condition for having a comparative advantage in that good. The comparative advantage of an industry depends not only on its productivity relative to the foreign industry, but also on the domestic wage rate relative to the foreign wage rate. A country’s wage rate, in turn, depends on the relative productivity in the other industries.
Does trade hurt developed countries when they compete with low-wage countries?
This argument is called the “pauper labour argument” which claims that industries in developed countries should be shielded from competition with foreign industries which may be less efficient but pay lower wages. It may be said that developed countries are more productive than developing countries and that the latter’s lower cost of production is due to lower wage rates, but this is irrelevant when assessing the gains from trade. What is crucial in Ricardo is that it is cheaper for a country to produce a good in terms of its own labour and trade it for another good, than to produce the imported good for itself.
Does international trade lead to the exploitation of workers in poor countries?
In Ricardo, both countries gain from trade as trade expands the consumption possibilities. In the absence of trade, real wages would be even lower.
Compared to the US, Bangladesh has both a smaller population and less capital. In absolute terms, Bangladesh is not abundant in any resource. Does this imply that Bangladesh has nothing to export to the US?
What matters most is not the absolute abundance of factors, but their relative abundance. The ratio of labour to capital may be higher in Bangladesh than in the US - in other words, there is a relative scarcity of labour in the US and a relative abundance of labour in Bangladesh. Bangladesh will produce mainly labour-intensive goods and export them to the US, while the US will produce mainly capital-intensive goods and export them to Bangladesh.
Historically, labor unions in developed countries have represented the interests of blue-collar workers. They have also been opposed to free trade agreements with developing countries. Is their stance on free trade reasonable within the framework of the Heckscher-Ohlin model?
In the HO model, unskilled workers in developed countries are hurt directly by opening to trade as they are the relatively scarce factor and trade favours the export of skill-intensive sectors and the imports of low-skill goods. In this respect, the predictions of the HO model support the claims of labour unions. However, a better outcome would be to have a free trade and compensate those who lose, especially since the overall gains exceed the losses in any given sector.
Are the predictions of the Heckscher-Ohlin model contradicted by the observed trade patterns?
The HO model predicts that countries should export those goods who production is using intensively the relatively abundant factors. As such, the US should be a net exporter of capital-intensive goods as it has a higher capital-to-labour ratio than the rest of the world.
The Leontif paradox however, observes that the US exports labour-intensive goods and imports capital-intensive goods. Bowen, Leamer and Sveikaukas also observe that for the world as a whole, the correlation between factor endowment and trade patterns is only 0.61.
Internal or external economies of scale?
Internal economies of scale allow average costs to decrease with increased production. This can happen when production is concentrated in one location to save on costs.
For external economies of scale, firms cluster to take advantage of specialised suppliers, labour market pooling and knowledge/technological spillovers. Production is concentrated within a few locations in the same geographic region to take advantage of this.
Explain the tendency of industrial clusters to break up and for production to shift to places with lower wages when the technology within a sector is no longer improving.
As the forces driving external economies of scale are weakening, there are fewer incentives to concentrate within given location to take advantage of the pooled labour market and knowledge/technological spillovers. The location of firms is now driven by factor cost considerations (e.g. lower wages, lower prices of intermediate goods, etc.).
If there are internal economies of scale, why would it ever make sense for a firm to produce the same goods n more than one production facility?
The advantage of producing the same good in one location is that economies of scale are maximised (average costs are minimised). However, this means that a firm has to pay higher transport costs when shipping to farther locations. If these costs are large enough, it might be profitable to split production in multiple locations.
E.g. the Yaris/Corolla is produced in different places because Toyota wants to save on tariffs and trade costs.
Why do countries trade in the Ricardian model and what are the predicted trade patterns?
Countries trade in Ricardo because of international differences in the productivity of labour, which determines a country’s comparative advantage. Countries will export goods that their labour produces relatively efficiently and will import goods that their labour produces relatively inefficiently.
What are the implications of the Stolper-Samuelson theorem for inequality in developed countries after they open up to trade?
Stolper-Samuelson predicts an increase in inequality in developed countries - the scarce factor (low-skilled workers) will be hurt by opening to trade whereas the abundant factor (high-skilled workers) will gain.
What are main sources of external economies of scale? Briefly describe each.
There are 3 main sources.
Specialised suppliers who specialise in one aspect of the production process and outsource other stages of production to neighbouring firms.
Labour market pooling consists of firms with specific skill needs will prefer to locate near a large pool of workers with those skills to limit labour market shortages. At the same time, skilled workers prefer to locate close to the firms that hire them to limit unemployment.
Knowledge spillovers means having similar firms located next to each other will lead to increased sharing of ideas and partnerships.
What is the definition of monopolistic competition?
In monopolistic competition, an industry contains a number of firms producing differentiated products. These firms act as individual monopolists, but additional firms enter a profitable industry until monopoly profits are driven to 0.
