International Trade Flashcards
What are five benefits of international trade?
Countries gain from exchange and specialization.
Industries experience greater economies of scale.
Households and firms have greater product variety.
Competition is increased.
Resources are allocated more efficiently.
Why do countries gain from exchange and specialization?
International trade can enable each country to receive a higher price for its exports or pay a lower price for imported goods instead of producing these goods domestically at a higher cost. This leads to a more efficient allocation of resources by increasing production of export good and reducing production of the import good. Thus, increasing overall welfare.
What is the Ricardian model?
A classical trade theory that explains international trade based on comparative advantage, where countries specialize in producing goods they can produce more efficiently (lower opportunity cost) due to differences in labor productivity. It assumes a single factor of production (labor) and constant opportunity costs.
What is the Heckscher-Ohlin model?
A trade theory that explains international trade based on differences in factor endowments (labor and capital). It states that a country will export goods that use its abundant factors intensively and import goods that use its scarce factors intensively. The model assumes two factors of production, two goods, and two countries (the 2×2×2 model) with identical technology but different resource endowments.
What is intra-industry trade?
When a country exports and imports goods in the same product category or classification.
Can trade liberalization lead to increased real GDP and why?
Research suggests yes. International trade can increase real GDP by more efficient allocation of resources, learning by doing, higher productivity, knowledge spillovers, trade-induced changes in policies etc.
What are opponents of free trade?
Greater income inequality
Loss of jobs in developed countries
What are trade restrictions (protections)?
Government policies that limit the ability of domestic households and firms to trade freely with other countries. Examples include tariffs, import quotas, voluntary export restraints (VER), subsidies, embargoes, and domestic levies on imported goods.
What are quotas for trade restrictions?
Quotas restrict the quantity of a good that can be imported into a country, generally for a specified period of time.
What are tariffs?
Tariffs are taxes that a government levies on imported goods.
What are Voluntary Export Restraints (VER)?
Voluntary export restraint is similar to a quota but is imposed by the exporting country.
What is an export subsidy?
Paid by the government to the firm when it exports a unit of a good that is being subsidized.
What are domestic content provisions?
Some percentage of the value added or components used in production should be of domestic origin.
What are capital restrictions?
Controls placed on foreigners’ ability to own domestic asset or domestic residents’ ability to own foreign assets.
Can tariffs increase global welfare?
No, a large country cannot gain by imposing a tariff unless it imposes an even larger loss on its trading partner.
How do tariffs create deadweight loss?
They give rise to inefficiencies on both the consumption and production side.
What is an import license?
The quantity that can be imported under a quota.
What are quota rents?
Profits for foreign producers
What is a regional trading bloc?
A group of countries that have signed an agreement to reduce and progressively eliminate barriers to trade and movement of factors of production among the members of the bloc. It could have trade barriers against countries that are not member of the bloc.
What are Free Trade Areas (FTA)?
All barriers to the flow of goods and services among members have been eliminated. However, each country maintains its own policies against non-members. USMCA is an example.
What are customs unions?
Form of trading bloc that extends the FTA by not only allowing free movement of goods and services among members but also by creating a common trade policy against non-members.
What is a common market in the context of trading blocs?
Incorporates all aspects of a customs union and extends it by allowing free movement of factors of production among members. MERCOSUR (Argentina, Brazil, Paraguay and Uruguay) is an example.
What is an economic union?
Incorporates all aspects of a common market but in addition, it requires common economic institutions and coordination of economic policies among members. European union is an example. When the countries also adopt the same currency, it becomes a monetary union!
What is trade creation?
When regional integration results in the replacement of higher-cost domestic production by lower-cost imports from other members.
What is trade diversion?
Occurs when lower-cost imports from non-member countries are replaced with higher-cost imports from members.
What are challenges of forming a trading bloc?
Cultural differences and historical considerations.
Maintaining a high degree of economic integration limits the extent to which member countries can pursue independent economic and social policies.
