International Trade Essay

Question 1

two main scholars in classical theory

Answer 1

Smith and Ricardo

Question 2

new trade theory scholar

Answer 2

paul krugman

Question 3

classical economy theory components

Answer 3

theory of supply and demand equilibrium, people are rational and seek to maximize their earnings

Question 4

a way for people to maximize their earnings…

Answer 4

trading

Question 5

measuring trade advantage

Answer 5

amount of labor input produces how much output

Question 6

absolute advantage

Answer 6

one country produces an item more efficiently than another

Question 7

comparative advantage

Answer 7

everyone gains from trade

Question 8

how can a country with absolute advantage in two or more areas gain from trade?

Answer 8

the other country may still make it more efficiently even if it makes less

Question 9

strengths of classical theory

Answer 9

shows why countries should trade and how they gain from it

Question 10

implications

Answer 10

free trade is beneficial to everyone, importance of labor efficiency, absolute advantage theory, gains from trade

Question 11

gains from trade:

Answer 11

GDP will increase for participants, productivity increases overall, everyone is better off

Question 12

weaknesses of classical theory

Answer 12

unrealistic assumptions, overemphasis on labor, political problems, economic problems, social issues

Question 13

unrealistic assumptions

Answer 13

constant returns to scale (inputs double = outputs double), all factors of production are collapsed into a single factor

Question 14

overemphasis on labor

Answer 14

inhumane labor conditions are cheap labor conditions, labor is difficult to move across borders

Question 15

political problems

Answer 15

unstable governments (arab spring) governments don’t always want to trade

Question 16

economic problems

Answer 16

comparative advantage can’t be totally free or borderless, developing economies with low wage pay and low social security systems don’t work in developed economies, does not take into account differences between general trade and processing trade, only sees reasons for trade because countries are different, neglects economies of scale

Question 17

general trade

Answer 17

the import or export of goods by enterprises in China with import-export rights

Question 18

processing trade

Answer 18

importing raw materials and exporting finished products

Question 19

social issues

Answer 19

related to political problems, human rights violations that get cheap goods, growing gap between rich and poor

Question 20

how is new trade theory different

Answer 20

focus on increasing returns to scale and network effects and acknowledges imperfect competition

Question 21

economies of scale:

Answer 21

production is more efficient the large the scale at which it takes place

Question 22

network effects

Answer 22

a good gets more valuable the more people use it (like a phone–only valuable when there are others with phones so you can call them)

Question 23

external economies of scale

Answer 23

when the cost per unit depends on the size of the industry but not necessarily on the size of any one firm

Question 24

imperfect competition

Answer 24

firms are aware that they can influence the prices of their products and that they can sell more of something if they reduce the price rather than let the market dictate the price

Question 25

implication 1: explains growth in globalization

Answer 25

takes MNEs into account, arbitrariness of increasing returns, more complex view of optimal trade policy, economies of scale incentivize trade

Question 26

arbitrariness of optimal trade policy

Answer 26

the more you invest the more you get back but there’s no real reason investment in one area becomes specific to a particular region

Question 27

more complex view of optimal trade policy

Answer 27

potential gains from trade are even larger thanks to increasing returns so there is stronger support for free trade and possible that tools such as export subsidies and tariffs may shift world specialization to benefit a specialized country

Question 28

market imperfection is beneficial to MNEs

Answer 28

enter trade with FDI to try and overcome imperfections, set up production in other countries, leads to more opportunities for increasing returns

Question 29

implication 2- world gains from trade multiple times through:

Answer 29

increasing returns, comparative advantage increasing production and consumption, and allowing lagging economies to catch up.

Question 30

ways world gains from increasing returns

Answer 30

reduces initial costs by allowing specialization which leads to increased efficiency, innovation, and new opportunities

Question 31

grand implications

Answer 31

multiple agents for trade besides the market, integration of trade and other factors, new world order

Question 32

multiple agents

Answer 32

firms and structures, consumer groups, supranational government

Question 33

integration of trade and….

Answer 33

firms, everyday life (goods, people, capital, skills, knowledge)

Question 34

new world order

Answer 34

WTO, UN–countries want peace so they can trade and benefit economically