Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Sem 3 > International Trade > Flashcards

International Trade Flashcards

1
Q

What is a difference in prediction between HO model and Ricardian model?

A

HO predicts that factor prices will be equalised.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Why are factor prices not equal around the globe?

A

The HO model assumes countries produce the same goods, while in reality this does not happen. The HO model also assumes that country have the same technology. Trade is not perfect ( barriers to trade)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

When does external economies of scale occur?

A

When the cost per unit depends on the industry but not necessarily on the size of one firm.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the characteristics of markets with external economies of scales vs internal economies of scale?

A

Industries with external economies of scale will usually consists of many small firms that are perfectly competitive. Industries with internal economies of scale will give large firms a cost advantage over small firms, leading to imperfect competition.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are Marshall’s arguments for a cluster of firms being more efficient than few larger firms (external economies of scale)?

A

Specialised Suppliers
Market Pooling
Knowledge Spillover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How does trade take advantage of external economies of scale?

A

Theoretically, the country with the lowest price of a good will be the one exporting it to the rest of the world. This will increase production for this country, further lowering costs by taking advantage of economies of scale.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a learning curve? What is the concept it called? What argument against trade stems from this?

A

A curve that shows how the cost of producing a product decreases as the cumulative amount of product produced since the first day of production increases.

Dynamic increasing returns. The infant industry argument.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

In what type of trade is external economies of scales particularly important?

A

In interregional trade.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Do industries tend to move where factors of production are or the other way around?

A

Factors tend to move where the industries are because they are highly mobile within countries.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the formula for the difference between the demand curve and MR in monopolistic competition?

A

P - MR = Q/B
Where Q is the initial sales and B is the slope of demand.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the formula of AC in monopolistic competition and how does it explain gains from trade?

A

AC = n*F/S + c
Trade increases market size S, reducing AC.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is intra-industry trade?

A

Two- way exchange of similar goods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Do smaller or larger countries gain more from integration?

A

Smaller

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Who are the losers of intra-industry trade?

A

Less efficient firms, which are forced to exit. This however improves the overall efficiency of the market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are extensive and intensive margins?

A

Extensive margins are the number firms selling to customers abroad, intensive margins is the volume of exports sales.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is dumping? What are the conditions for it?

A

Charging lower prices for goods sold abroad than goods sold domestically. For this to happen there must be imperfect competition, markets are segmented.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is a common response to dumping?

A

Protectionist measures such as tariffs or antidumping duty.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is foreign direct investment?

A

When a firm in one country directly owns or controls a subsidiary in another country.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What are greenfield and brownfield FDIs? Vertical FDI? Horizontal FDI?

A

Greenfield is when a company builds a new production facility abroad, brownfield is when a domestic firm buys a controlling stake in a foreign firm. Vertical FDI is when the production chain is broken up and partially transferred to other locations. Horizontal FDI is when the affiliates simply reproduce the production process of the original firm.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What does the vertical FDI decision involve? The horizontal one?

A

Vertical has to do with the trade off between cost savings and the fixed costs of setting up an additional facility.

Horizontal has to do with the trade off between transportation costs and the fixed costs of setting up a new facility.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is internalisation?What are the reasons for it?

A

it occurs when it is more profitable to conduct transactions and production within a single organisation.

Technology transfers, vertical integration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is the equation for the gravity model?

A

(A x Yi x Yj)?Dij
The prdoct of the country’s GDPs and the constant A, divided by the economic distance between the two countries.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the Ricardian model based on?

A

Differences in labour productivity, labour is the only factor of production. Two goods, wine and cheese, labour productivity is constant.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What does it mean for a country to have a comparative advantage over the other?

A

The opportunity cost of producing that good has to be lower than the opportunity cost to produce the same good in the other country.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What does the slope of the PPF represent in the Ricardian model represent?

A

The absolute value of the slope is the opportunity cost of cheese in terms of wine. (x axis in terms of y axis)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is the relationship between the relative prices of cheese and wine and the opportunity cost of cheese in terms of wine?

A

If the opportunity cost of cheese exceeds the relative price of cheese, then the wage to make wine will be greater than to make cheese. So only wine will be produced.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is the equation for the relative supply of cheese?

A

Total cheese produced in the world divided by total wine produced in the world.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What are the characteristics of the world relative supply?

A

It is a step function, first step is at the relative price of cheese equal to the home opportunity cost.
It then jumps at when the world relative supply of cheese equals home’s maximum cheese production.
The second step is at relative price of cheese equals foreign’s opportunity cost of cheese.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What are the assumptions of the Specific factors model?

A

2 sectors, cloth and food
3 factors of production, labor, capital and land.
Perfect competition in all markets
Output of each good is determined by respective production functions with the two respective inputs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

How can you represent the production possibility frontier of the factor specific model?

A

A four quadrant diagram. Top left is production function of food, bottom left is the allocation of labor between the two sectors(just a straight line). Bottom right is production function of cloth. Top right is PPC.
You have to start from the labor distribution and draw lines to the respective functions to find out how much cloth and food is made.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Why is the PPC curved? What does the slope represent?

A

Diminishing returns to labor cause the opportunity cost to rise when more of a product is produced. The slope is the opportunity cost of cloth in terms of food. Which becomes steeper as more cloth is produced.

32
Q

What is another way of representing opportunity cost of cloth?

A

MPLf/MPLc

33
Q

How will wage be determined? Why? What identity do we have as a result of this?

A

Wage will be at the point : MPLf x Pf = MPLc x Pc. Because the wages in the two sectors need to be equal otherwise people would just move the the sector with the higher wage until the wages are equal again.

MPLc/MPLf = Pf/Pc

34
Q

What happens to wages when there is a proportional increase in the price of food and cloth?

A

Wages increase proportionally as the two demands for labor simply shift up. The real wages however does not change.

35
Q

What happens when the price of only one of the two goods increases?

A

Labour will shift towards the production of the good whose price has increased until wages are equalised again.

36
Q

What is the budget constraint when we open up to trade?

A

Df - Qf = (Pc/Pf) x (Qc-Dc)
Basically you cannot spend on imports more than you make on imports

37
Q

What happens to wages across the world if there is free labor movement? (no obstacles to migration)

A

Wages across the world should equalise.

38
Q

What does the HOS model argue for as the reason behind trade?

A

That trade takes places due to differences in labor, labor skills, physical capital , capital or other factors of production across countries.

39
Q

What does the point at which the iso value line touches the PPF mean in terms of opportunity cost?

A

The slope of the PPF is the relative price of cloth, and at the point at which the iso value line touches, the opporunity cost of producing cloth in terms of food is equal to its relative price.

40
Q

What is the difference in production of cloth and food?

A

Cloth is more labor intensive while food is more capital intensive.

41
Q

What is the Stolper-Samuelson theorem?

A

If the relative price of a good increases, then what is paid to the factor used intensively in the production of that good increases.

42
Q

What would an increase in the relative price of cloth mean for workers and cpital owners in the HO model?

A

Workers would have higher purchasing power due to higher wages, capital owner’s would be reduced.

43
Q

What is the Rybczynski theorem?

A

If you hold output prices constant, as the amount of a factor of production increases, then the supply of the good that uses that factor intensively would increase and the supply of the other good would decrease.

44
Q

What is the Heckscher-Ohlin theorem?

A

A country will export the good whose production is intensive in the factors that country is abundantly endowed.

45
Q

How can income distribution be hurt by trade in the US who is abundant in high skill labour and scarce in low skilled labour?

A

Trade will hurt low skilled labour as the goods they produced will become imported from countries that are abundant in low skill labour. This can increase the wage gab between low skilled and high skilled.

46
Q

How can trade have contributed to increase in wage inequality?

A

Accelerating the process of technological change
Breaking up the production process across countries

47
Q

What is the Leontief paradox?

A

He found that US exports were less capital intensive than its imports, even though the US is the more labour abundant country in the world. This was also confirmed by data from 27 countries.

48
Q

What is the standard trade model?

A

It is a general model that includes Ricardian, HO and specific factors models as special cases.

Two goods, food and cloth.

49
Q

What is derived from the PPF and iso value line?

A

The relative supply curve.

50
Q

How does the iso-value line show that when the price of their export rises a country is better of?

A

The iso-value line becomes steeper, meaning that higher indifference curves can be reached.

51
Q

What are terms of trade? What effect does it have on welfare?

A

Price of exports relative to the price of imports. Higher terms of trade have a positive effect on welfare and vice versa.

52
Q

What effects does biased growth have on the terms of trade?

A

Biased growth worsens the terms of trade for the good that is experiencing it. i.e. if there is biased growth in cloth and you are an exporter of cloth, the terms of trade worsen.

53
Q

What is import biased growth? What is export biased growth?

A

Export biased growth expands a country’s production possibilities disproportionately in that country’s export sector. This worsens the terms of trade.

Import biased growth expands a country’s production possibilities disproportionately in that country’s import sector. This improves the terms of trade.

54
Q

What effect does an import tariff have?

A

It will increase relative supply of that import at home, and it will decrease the relative demand of that import at home.
It may increase the terms of trade, depending on the size of the home country relative to the world economy.

55
Q

What are the effects of a subsidy?

A

The terms of trade decrease and the welfare of that country decreases to the benefit of the foreign country.

56
Q

What does the model of comparative advantage assume?

A

Constant returns to scale

57
Q

What is the difference in the prediction of prices in ht external economies compared to the standard trade model?

A

With the external economies prices will reduce everywhere, not convergence.

58
Q

What is a gain from trade for internal economies of scale?

A

The overall efficiency improves, as production is concentrated towards more efficient firms.

59
Q

Where is profit maximisation for monopoly?

A

MC=MR

60
Q

Where is profit maximisation for monopolistic competition?

A

MC=MR (of the whole industry)

61
Q

How can we obtain the number of firms in a market under monopolistic competition?

A

By setting AC = P
which leads to sqrt(S/Fb)

62
Q

When is a firm considered a multinational?

A

When it invests more than 10% of stocks in an international subsidiary

63
Q

What is internalisation??

A

When it is more profitable to conduct transactions and production within a single organisation.

Technology transfers, vertical integration involves consolidation of different stages of a production process.

64
Q

What is an import demand curve?

A

The difference between the quantity that home consumers demand and the quantity supplied by home producers. MD = D-S

65
Q

What is an export supply curve?

A

XS = S* - D*

66
Q

What is the effect of a tariff on domestic and foreign prices?

A

Tariff will increase domestic prices and decrease foreign prices.

67
Q

What is the effective rate of protection?How do you calculate it?

A

It is the change in value that firms in an industry add to the production process when trade policy changes, which depends on the change in prices the trade policy causes.

You calculate it by finding the percentage change in value added.

68
Q

What is always true about the welfare effect of an export subsidy?

A

It always damages national welfare

69
Q

What is a local content requirement?

A

A regulation that imposes for a fraction of a final good to be produced domestically.

70
Q

What are the main arguements for free trade?

A
  • Markets allocate resources most efficiently
  • Economies of Scale
  • Competition and opportunities for innovation
  • Avoids loss of rent seeking
  • Political argument for free trade (best feasible outcome: policy too easy to manipulate)
71
Q

What are the main arguments against free trade?

A
  • Tariff leads to terms of trade gain for large countries
  • Export tax rate may exist such that national welfare is maximised
  • Domestic market failures
  • MSB
  • Theory of the second best
72
Q

What are the two ways trade policy is determined?

A

Median voter theorem
Collective action

73
Q

What is the WTO for ?

A

The world trade organisation was established as a formal organisation for implementing multilateral trade negotiations.

74
Q

What are the problems with the infant industry argument?

A
  • It may be wasteful
  • with protection, infant industries may never become competitive
  • no justification for gov intervention unless there is a market failure that prevents the private sector from investing in the infant industry
75
Q

What is activist trade policy?

A

Policy that supports export industries through subsidies

76
Q

What should a government consider before subsidising high tech industries?

A
  • Its ability to subsidise the right activity
  • Could just subsidise R&D instead
  • Economic importance of externalities
  • Externalities may occur across countries as well
77
Q

What does the Kuznets curve show?

A

That countries initially do more environmental damage in order to grow, but past a certain point further growth will actually result in less environmental damage.

Sem 3 (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions