Exam 1 vocab Flashcards
Relative Price
The price of one good expressed in terms of another good
Consumption Possinilities Frontier
A budget constraint showing the maximum amount of one good that an economy can consume for every quantity of the other
Terms of Trade
The price of a country’s imported goods relative to the price of the good that it exports
How do Terms of Trade improve?
The price of imports become less expensive relative to exports
What do improved terms of trade do?
Increases the benefit of trade to a country while reducing the benefit to its trading partner
Marginal Product of Labor
The amount of extra output produced by hiring one more worker
Value of the Marginal Product of Labor
The extra revenue that a firm earns by hiring one more worker
Absolute Advantage
When a country can produce more of a given good than the other country when they both use the same quantity of resources
Real Wage
The quantity of goods that a person can buy with their wage
Factor Intensity
A product is either labor intensive or capital intensive depending on what it uses more of per worker than the other product
Factor abundance (and Scarcity)
A country is either labor abundant or capital abundant depending on what it uses more of per worker than the other country
Theorem
A result that follows from applying accepted rules of logic to an underlying set of fundamental assumptions
Leontief Paradox
Discovered by Wassily Leontief, an empirical finding that many capital-abundant countries tend to export relatively labor-intensive goods, which is in direct ccontradiction to the H-O model
Heckscher-Ohlin Theorem
The capital abundant country will have a comparative advantage in the capital-intensive good; the labor abundant country will have a comparative advantage in the labor intensive good
Stolper-Samuelson Theorem
Given the assumptions of the Heckscher-Ohlin model, trade reduces real income of the economy’s scarce factor
Monopolistic Competition
A market structure that combines elements of monopoly (firm has some market power) with elements of perfect competition (easy entry and exit from the industry, so economic profit = 0)
Intraindustry Trade
When a country both imports and exports goods from within the same industrial classification (imports and also exports cars)
Outsourcing
when a firm moves some tasks that it had been doing itself to another firm, regardless of location
Offshoring
When a firm moves some of the tasks that they had been doing in its own country to a foreign country. May or may not involve outsourcing
Fragmentation
For many goods, production may involve multiple stages that can be undertaken by different firms in different locations
Job Polarization
A situation where the shares of low-income and high-income jobs increase at the expense middle income jobs. Sometimes called “hollowing out”
What does a Ricardian PPF look like and why?
Straight, diagonal line. The slope is the same regardless of how much good is being produced becuse there is a constant cost of production
What does a Heckscher-Ohlin PPF look like and why?
Curved and downward sloping. The PPF gets steeper as more of X is produced. The opportunity cost of either product increases (and the other decreases) while more of that product is produced.
What do you need to know to find the opportunity cost in Ricardian?
Marginal Products
What do you need to know to find the opportunity cost in Hecksher Ohlin?
How much of each good is being produced in the economy
How do you determine factor intensity?
X is Captial intensive: Kx/Lx > Ky/Ly
Y is Labor intensive: Ly/Ky > Lx/Kx
What is the correct terminology of factor intensity?
Capital per worker, workers per unit of capital
w/r
the cost of labor relative to the cost of capital (wage/capital cost)
what does an increase in w/r cause?
firms will use relatively less labor and more capital to produce output, both sectors become less labor intensive
Why is Demand for labor relative to capital downward sloping?
When labor becomes more expensive relative to capital, firms economize and use less labor
Assume that Both factors can move between industries within a country
H-O, All workers within the same country make the same wage and all capital is paid the same rental rate
Assume that the two industries have different factor intensities
H-O, This ensures that the PPF exhibits increasing opportunity cost (it gets steeper moving left to right)
Assume that the two countries have different relative factor supplies
H-O, This implies that the Production Possibilites curves for the two countries are shaped differently
Assume that goods can be traded between countries; factors of production cannot move between countries
A simplifying assumption that makes analysis easier
Assume perfect competition in all markets
H-O, implies zero economic profit in equilibrium, so relative price equals opportunity cost
Assume that both countries have access to the same technology
H-O, This rules out differences in technology as a basis for trade, focusing squarely on differences between countries in relative factor supplies
Assume that technology is characterized by constant returns to scale
H-O, increasing or decreasing the use of all inputs by some proportion results in output increasing or decreasing by the same proportion, allowing us to define terms and state results in terms of ratios (proportions)
Assume that when given the same relative prices, all consumers choose to consume the two goods in the same proportions
needed to clearly compare autarky relative prices between countries (not to worry about it)
What does a flatter ppf mean in H-O?
There is a lower opportunity cost for the X axis good, implying factor abundance
