International Economics (Ingham) Flashcards
The following features characterised the mecantilist system ( 4)
- Extensive regulation of imports and exports
- Trade monopolies flourished
- Smuggling flourished
- There were significant incentives for European governments to establish colonial empires
Absolute advantage
The advantage that one nation has over another if it is able to produce a product with less resources than the other country
Comperative advantage
The advantage that one country has over another if it can produce a product at a lower opportunity cost than the other country.
Opportunity cost
The price of one product in terms of another, eg. the quantity of food that must be sacrificed to produce one more unit of clothing
Schema for evaluating Ricardian and Heckscher-Ohlin trade models
- Assumptions
- Predictions
- Empirical evidence
- Normative implications
- “Fruitfulness” in terms of further work.
Assumptions of the Ricardian model
- Perfect competition in factor and product markets
- Constant costs (linear homogeneous product function)
- Zero transport costs
- Labour perfectly mobile domestically but immobile internationally
- Labour theory of value: costs are determined by amount of labour utilised.
- Different production functions for the same commodity in different countries
Assumptions of the Heckscher-Ohlin model
- Perfect competition in factor and product markets
- Constant cost (linear homogeneous product function)
- Zero transport costs
- Labour perfectly mobile domestically but immobile internationally
- Several factors of production. Commodities display different factor intensities
- The same production function for the same commodity in different countries
Why, according to the Heckscher-Ohlin trade model, are there differences in comperative advantage?
Because of differences in relative factor endowments between nations:
- Countries have comparative advantage in commodities which use more of their relatively abundant factor of production
- Countries have comparative disadvantage in commodities which use more of their relatively scarce factor of production
Normative implications of the Ricardian and the Heckscher-Ohlin models
Both approaches strongly support a policy of free trade.
The H-O model is superior to the Ricardian model because it can tell us something about how the gains from trade will be distributed
4 Reasons for the Leontief paradox
- Natural resources are neglected (the test only focused on capital and labour)
- Exports are skill-intensive (The US has a relatively skilled labour force)
- Factor reversals occur
- Trade policy (the H-O model assumes perfect competition and free trade, but the US has powerful labour unions which lobby for protection against labour-intensive imports)
