International Trade Flashcards
1
Q
Why do firms engage in foreign trade?
A
- Profitability
- Export incentives
- Import Incentives
2
Q
What export incentives are there for foreign trade?
A
- Reduced per unit production costs
- Use of excess production capacity
- Price premium in foreign market
- Risk spreading
3
Q
What import incentives are there for foreign trade?
A
- Cheaper supplies
- Additions to product line
- Reducing risk in the supply chain
4
Q
What is the continuum of trade interdependence?
A
- High dependence at one end ( mainly small nations: Singapore, HK, Netherlands)
- High interdependence at the other end (Autarkical/poor countries: NKorea, Myanmar, Bhutan, Cuba)
5
Q
What are the issues concerning trade interdependence?
A
- Neighbouring countries trade more
- Effect on developing and transition economies
- Dangers of trade dependency
- Balance between dependence-independence
6
Q
What do trade theories?
A
- Shows why it is beneficial for a country to engage in international trade even for pdocuts it is able to produce itself
- Helps to explain patterns of trade between countries
7
Q
What are the key trade theories?
A
- Mercantilism
- Absolute Advantage
- Comparative Advantage
- Huckster & Ohlin theory of factor endowments
- Vernons Product Life-Cycle Theory
- New trade theory
- Porters’ National Competitive Advantage
8
Q
What is Mercantilism?
A
- Advocates encouraging exports and limiting imports
- See’s no virtue in large volume of trade
- Flaw is that trade is viewed as zero sum
- Neo-mercantilism equates political power with economic power and economic power with a balance of trade surplus
9
Q
What is Hume’s critique of Mercantilism?
A
- A trade surplus will swell domestic money and create inflation, whereas the trade partner will see its money supply contract and prices fall
- This change in relative prices will encourage trade partner to buy fewer domestic goods as they are more expensive, and the domestic consumers to buy more foreign goods as they are becoming cheaper
- The result is a decoration in the domestic balance of trade and an improvement in the partners balance until the original surplus is eliminated
10
Q
What is Absolute Advantage?
A
- Adam Smith - attacked the notion that trade is zero sum
- Countries should specialise in the production of goods in which they have an absolute advantage and then trade these goods for those produced by others
11
Q
What is comparative advantage?
A
- David Ricardo
- Smith’s theory suggests that a country that has an absolute advantage in all goods may garner no benefit from trade
- Ricardo suggests that country’s should specialise in the production of those goods that it produces more efficiently and to buy the others, even if they could produce said goods themselves
- Leads to the fact that potential world trade production is greater with unrestricted trade than it is with restricted trade
- Stressed that comparative advantage arises from differences in productivity - particularly labour
12
Q
What are the qualifications and assumptions of Comparative Advantage theory?
A
- Assumes only two countries
- Assumed away transport costs
- Assumed away differences in the prices of resources in different countries and exchange rates
- Assumed free movement of resources from the production of one good to another
- Assumed constant returns to scale
- Assumed fixed stock of resources and that free trade does not change the efficiency with which a country uses its resources
- Assumed away the effects of trade on income distribution
13
Q
What are the extensions of comparative advantage theory?
A
- Immobile resources
- Diminshing returns
- Dynamic Effects & Economic Growth
- Samuelson Critique
14
Q
What is the immobile resources extension of comparative advantage theory?
A
- Resources do not always move easily from one economic activity to another
- Process can create friction and human suffering
15
Q
What is the diminishing returns extension of comparative advantage theory?
A
- It is more realistic to assume DRS because not all resources are the same quality and different goods use resources in different proportions
- DRS means that it is not feasible for a country to speicialise to the extreme - gains from specialisation are likely to be exhausted before specialisation is complete
16
Q
What is the dynamic effects & economic growth extension of comparative advantage theory?
A
- Free trade may increase a country’s stock of resources as increased supply of labour and capital from abroad become available
- Free trade might also increase the efficiency with which a country uses its resources - economies of scale
17
Q
What is the Samuelson Critique extension of comparative advantage theory?
A
- The lower price a rich country’s consumer pay for goods imported from a poor country may not be enough to produce a net fain for the rich country if the dynamic effect of free trade is to lower wages in the right country
- Outsourcing etc. may have similar effects to mass inward migration into the rich country - will lower market clearing wage rate, possibly by enough to outweigh the benefits of trade
- Evidence exists in support - however in the long run trade is undeniably a benefit
18
Q
What is Huckster & Ohlin theory of factor endowments?
A
- Questions Ricardo’s assumption that labour productivity differences underlie comparative advantages
- Argues that it instead arises from national factor endowments
- Most economists prefer Heckscher-Ohlin’s theory to Ricardo’s because it makes fewer simplifying assumptions s
- Leontief Paradox
- Assumes that tech is the same across countries
- Once tech is controlled for across countries, empirically is sound
19
Q
What is the Leontief Paradox and what is it a factor in?
A
- Huckster & Ohlin theory of factor endowments
- Postulated that because the US was relatively abundant in capital compared to other nations, the US would be an exporter of capital intensive goods and an importer of labour intensive ones
- This is not the case
- One possible explanation is the US has a special advantage in producing new products made with innovative tech. Such products may be less capital-intensive than those that have matured and become more suitable for mass production
- Some studies confirm this
20
Q
What is Vernons Product Life-Cycle Theory?
A
- Wealth and size of the US gives firms a strong incentive to develop new products - high cost of labour gives them incentive to develop cost saving process innovations
- Most new products are initally produced in America as production facilities are better kept close to market and decision making given the uncertainty and risks in producing new products
- Further, the demand for most new products tends to be based on nonprice factors, therefore firms can charge relatively high prices which obviates the need to look for low cost production alternatievs
- Early in the cycle, when demand is growing in the US it is limited to high income groups in other countries - not making it worthwhile for firms in those countries to start production, but does necessitate some exports
- As demand in other advanced countries begins to grow, it become worthwhile for foreign producers to begin production or for US firms to set up foreign production facilities
- Consequently, production within other advanced countries begins to limit the potential for US exports
- As the product becomes more standardised, price becomes the main competitive weapon
- The cycle by which the US lost its advantage to other advanced countries might be repeated once more as developing countries begin to acquire a production advantage
- Overall, US moves from being an exporter to an importer of the same product
21
Q
What is the empiricism of Vernons Product Life-Cycle Theory?
A
- Seems to be an accurate explanation of internatioal trade patterns
- However recently the US has not been the only driver of product innovation - S Korea, Japan
- Further, increased globalisation means that an increasing number of new products are introduced simultaneously worldwide
22
Q
What is New Trade Theory?
A
- Krugman
- Is at variance with Heckscher-Ohlin theory, factor endowment not important
- Product variety and costs
- First mover advantage
- Empirically valid
23
Q
What is product variety and costs in New Trade Theory?
A
- Through it’s impact on economies of scale, trade can increase the variety of goods and decrease the average costs
- As the size of the market expands due to trade, firms will attain better e.o.s, allowing for (1) lower costs and (2) production of goods that are too expensive to produce in the absence of these trade e.o.s’s
- This implies that each nation may be able to specialise in producing a narrower range of products that it would in the absence of trade, yet by buying goods that it does not make, each nation can simultaneously increase the variety of goods and lower the costs of those goods
- Thus trade offers an opportunity for mutual gain even when countries do not differ in their resource endowments or technology
24
Q
What are first mover advantages in New Trade Theory?
A
- In industries where the output required to attain economics of scale represents a significant proportion of total world demand, the global market may be able to support only a small number of firms
- First movers can gain a scale-based cost advantage that later entrants find almost impossible to match
