Important theories

Question 1

Comparative Advantage

Answer 1

A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in Home than in Foreign. For example: aLC/aLW < aLC/aLW. Comparative advantage drives trade.

Question 2

Factor Price Equalization

Answer 2

According to the Heckscher-Ohlin Model, international trade leads to a complete equalisation of factor prices. That means that by trading goods, the countries are indirectly trading factors of production. Home “indirectly imports land through its labor intensive exported good and the opposite. This holds as long as the both countries continue to produce both goods.
In the real world, this is not the case since HO-model is based on key-assumptions that do not happen IRL:

Question 3

Rybczynski Theorem

Answer 3

If an economy’s factor of production increases, the output of the good that uses that factor intensively will increase and the other good will decrease. This is because the labor/land ratio and if that tells us that a good is land or labor-intensive.

Question 4

The Heckscher-Ohlin Theorem

Answer 4

A country will export that good which uses intensively its abundant factor and import that good which uses intensively its scarce factor

Question 5

What is a specific factor?

Answer 5

Factors that can be used only in the production of one good

Question 6

Efficiency argument for free trade

Answer 6

Adam Smith citatet, man ska inte promota för de som inte är lika bra som någon annan genom att införa tariffer osv. Man ska göra det man är bäst på och sen tradea.

Question 7

Political argument for free trade

Answer 7

Om man inför tariffer och skit så är det ofta av egna intressen men om man har free trade så tas inte detta into account

Question 8

Why would export subsidies be good according to the Social Marginal Benefit?

Answer 8

When doing export subsidies, we might be able to make people employed by holding subsidies up instead of just paying bidrag to unemployed people. Therefore, the Social Marginal Benefit might be pretty good.

Question 9

Problems with market failure argument

Answer 9

Det kan vara lika bra att deala med problemen direkt istället för att sätta upp tariffer osv för att underlätta för problemen så som R&D, unemployment osv

Question 10

Domestic Market Failure

Answer 10

Det finns mer saker än ekonomiska fördelar som gör att vi sätter upp interventions i free trade. T.ex sociala som att gynna arbetskraft hemma, gynna forskning osv.
“The domestic market failure argument against free trade is a particular case of a more general concept known in economics as the theory of the second best. This theory states that a hands-off policy is desirable in any one market only if all other markets are working properly.”

Question 11

“Second Best Policy”

Answer 11

Att t.ex. sätta upp tariffer för att deala med domestic market failures

Question 12

Import Quota & import quota rents

Answer 12

An import quota is a direct restriction on the quantity of some good that may be imported. The restriction is usually enforced by issuing licenses to some group of individuals or firms, in some cases the right to sell is given directly to the government of exporting countries.
The quota rent is the revenue the license holder will receive from holding the license.

Question 13

Smooth-Hawley Act

Answer 13

A remarkably irresponsible tariff law passed by the US in 1930. Under this act, tariffs rose steeply and US trade fell sharply, some economists argue that the Smoot-Hawley act helped deepen the great depression. Within a few years after the act’s passage, the US administration concluded that the tariffs needed to be reduced. They reduced the tariff after negotiations with exporters and reduced from 59% to 25%.
20.000 goods. They did it to protect domestic production.

Question 14

Strategic Trade Policy

Answer 14

Strategic Trade policy is defined as trade policy that conditions or alters a strategic relationship between firms, implying that strategic trade policy focuses primarily on trade policy in the presence of oligopoly. This argument locates the market failure that justifies government intervention in the lack of perfect competition. In imperfectly competitive global markets firms earn excess returns which there is an international competition over (profit). A government can alter the rules of game to shift these excess returns from foreign to domestic firms.

Question 15

Stolper-Samuelson Theorem

Answer 15

Heckscher-Ohlin Model. If both goods continue to be produced, the increase in the relative price in a good benefit the factor that was intensively used in the production of that good. This will hurt the other factor (for example land if cloth-price increase).

Question 16

Political argument for Free Trade

Answer 16

The idea that free trade is the best foreign trade policy since any governmental restriction can be subjected to bias, lobbyist pressure and/or human error.

Question 17

Biased growth

Answer 17

Growth which is not evenly distributed over all manufacturing sectors. Biased growth takes place when the PPF shifts out more in one direction than in the other. Growth may be biased for two reasons; 1. Technological progress in one sector of the economy will expand the economy’s production possibilities more in the direction of that sectors output. 2. The increase of the supply of a factor of production will produce growth biased to the production which uses that factor intensively. Export-biased growth disproportionately expands a country’s production possibilities in the direction of the good it exports - Worsens a growing country’s terms of trade, to the benefit of the rest of the world. Import-biased growth disproportionately expands a country’s production possibilities in the direction of the good it imports - Improves a growing country’s terms of trade at the rest of the world’s expense

Question 18

Leontief paradox

Answer 18

According to the Heckscher-Ohlin model a country with a relatively high capital-labor ratio would be an exporter of capital-intensive goods and an importer of labor-intensive goods. Using data from 1947, Leontief (1953) found that this was not the case: US exports were less capital-intensive than US imports -> The Leontief paradox. Problems with Leontief’s finding: only uses US data, has data on trade, technology but not factor supplies: Leontief just assumes that US is capital-abundant, makes no distinction between high-skilled and low-skilled labor, does not allow for natural resources (land, oil reserves, etc.) as factors of production.

Question 19

Dumping

Answer 19

A pricing strategy (discrimination) in which a firm charges lower prices for exported goods than for the same goods sold on the domestic market. Two conditions are required for dumping to occur:
1. The industry must be imperfectly competitive, so that firms set prices rather than taking market prices as given. 2. Markets must be segmented, so that domestic residents cannot easily purchase goods intended for export. It could be profitable for example for a monopolist facing different demand curves at home and abroad.
In the US they have a anti-dumping policy.

Question 20

Labor intensive

Answer 20

Cloth production is labor-intensive if at any given wage-rental ratio, the labor-land ratio used in the production of cloth is greater than the one used in food.

Question 21

Immiserizing growth

Answer 21

The theoretical situation that economical growth could make a country worse of than before the growth due to the growth being export-biased.

Question 22

Preferential trading agreements

Answer 22

Agreement under which the tariffs some nations apply to each other’s products are lower than the rates on the same goods coming from other countries. It is against GATT rules for country A to have lower tariffs on imports from country B than on those from country C. But it is acceptable if countries B and C agree to have zero tariffs on each other’ products. That is, the GATT forbids ”preferential trading agreements” in general, but allows them if they lead to free trade between the agreeing countries.

Question 23

Production possibility frontier

Answer 23

the maximum amount of production of a good a country can produce for any given amount of the other good.

Question 24

Terms of trade

Answer 24

Terms of trade (TOT) refers to the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods.

Question 25

The Heckscher-Ohlin-Vanek Theorem

Answer 25

Looking at the factor content of trade, each country exports those factors for which the factor share exceeds the income share, and oímports those factors for which it is less.

Question 26

The Infant Industry Argument

Answer 26

Developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries in developing countries cannot initially compete with well- established manufacturing in developed countries. To allow manufacturing to get a toehold, governments should temporarily support new industries, until they have grown strong enough to meet international competition.

Question 27

Voluntary Export Restraint (VER)

Answer 27

A VER is an export quota administered by the exporting country. VERs are usually imposed at the request of the importer and are agreed to by the exporter to forestall other trade restrictions. Most Famous Example:VER on Japanese auto exports to US from 1981 to 1985.
 Limited auto exports to 1.68 million in 1981 VER drove up the price of the typical Japanese import by ≈$2,500 in 1984 $ 5 billion extra cost to US consumers  VER drove up price of domestic models by ≈$1,000 in 1984
 $8 billion extra cost to US consumers US car makers gained $8 billion in profits due to VER in 1984.

Question 28

Metzler paradox

Answer 28

The basic conclusions on the effects of a import tariff/export subsidy could possibly be reversed if, for example, a tariff improves the terms of trade so much that the internal relative price of the import good falls.

Question 29

Stolper-Samuelson

Answer 29

If a both goods continue to be produced, an increase in the relative price of a good will benefit the factor that was intensively used in the production of that good. It will hurt the other factor. For example, if cloth is labor-intensive, an increase in the relative-price of cloth will benefit labor and hurt another factor, say land. Or more specifically, it will hurt the land-owners.