intl trade exam Flashcards
What is the gravity model
The size of an economy is directly related to the volume of imports and exports (^ country size –> produce more G/s –> ^X and produce more income to ^M
Other factors of gravity model
- Distance - ^distance between countries –> ^cost of supply chain – ^price
- Cultural affinity - Countries with cultural ties –> ^connection
- Geography - conditions between countries
- MNCs –> Can transfer G/S between bases –> ^X/M
- Boarders –> ^formalities/cultural difference –> ^costs (tariffs)
What is balance of payments
Accounts for a country’s payments to and receipts from foreigners
What is the structure of BOP
Current Acct + Capital acct + errors/omissions = Financial account
What is Net International Investment Position
Measures gap between a nation’s foreign assets and foreign nation’s stock of the home nation’s assets.
US is trending poorly (Holds lots of foreign assets)
What is a current account surplus/deficit
Surplus X greater than M (e.g. Germany)
M greater than X (e.g. US)
Describe the twin deficit hypothesis
A government deficit and a CA deficit occuring at the same time
^Government tax cuts –> ^consumption by consumers –> DECREASE saving –> ^ gov borrowing from abroad
Role of a country’s current account
- Shows signs and direction of a country’s intl borrowing/lending
- Important aspect of a country’s net foreign assets and net positon
Role of a country’s investments (come back)
Norway J Curve question (short-term impacts)
- Materials and machines have to be imported to build oil platforms (^CAD)
- ^CAD – negative impact on financial account and the NIIP (doesn’t just mean a negative NIIP - it depends on previous NIIP levels)
Norway J curve question (long-term impacts)
- Oil can be produced and exported to other countries (^CA –> ^FA - due to ^Capital X)
- If investment works –> ^NIIP
Can a current account deficit be good?
- If accuring investment can be paid by the revenue of realized project
- If subsequent generations aren’t worse off
- Subsequent generations generations will lose if CA deficits are only used to finance consumption (or gov expenditure) today
- Today’s generation may be in favour of ^CAD, future generations must repay debt
Comparative Adv definiton
When a country produces a good/service at a lower opportunity cost than another and can therefore export it whilst importing a good it produces with more opportunity
Absolute Adv
When a country produces more volume of a good than another country (not necessarily based on opportunity cost like comparative adv)
Definition of law of one price
An assumption that once trade has begun, we expect a frictionless world (no trade barriers, no transport costs) with an equalization of prices
How is law of one price applied if price for identical good differs between countries
Arbitrage opportunity evens the prices over time
What is the arbitrage opportunity
Trader purchases good in cheaper market and sells it in more expensive market - over time prices would be aligned to equilibrium
What is the PPP
Part on curve representing production levels that cannot be attained given a country’s resources etc
What is absolute PPP vs relative PPP
Absolute: Statement about price and exchange rate LEVELS
Relative: Statement about price and exchange rate CHANGES
Empirical evidence of PPP
Very weak for the absolute version in short run
Evidence only for relative in long run
Reasons for failure of PPP
- Arbitrage is limited through trade barriers/transportation costs
- Commodity trade is negligable compared to capital transactions
- National differences in underlying commodity basket and change in TOT of tradable goods cause an ex rate unequal to 1 - hence deviation from PPP price
Japan and US graph and PPP discuss
Shows a correlation between exchange rate change and Japan US price level ration - indicating relative PPP
What is the Big Mac index?
Compare’s each country’s exchange rate with hypothetical alternative: the rate that would equalize Big Mac prices around the world
Motivation of Ricardo-Viner Model
Trade will affect different groups within a country differently
Reasons why groups are affected differently under ricardo-viner
- Production factors are immobile between sectors within a country
- Sectors differ in their factor demands
What does Ricardo-Viner model allow
Allows for the analysis of distributional conflicts within a country
Internal economies of scale
Occurs when the cost per unit of output depends on the size of the firm
External economies of scale
Occurs when cost per unit depends on size of industry
How can a country disadvantaged in trade despite having increased economies of scale
Thailand/Switzerland example:
Switzerland has already been in the market and therefore Thailand can’t catch up, having to import from Switerland at a more expensive price.
Therefore more price efficient to have trade barriers for Thailand
Causes of internal economies of scale
Better use of factories, learning effects
Causes of external economies of scale
Specialised suppliers, labor pooling, knowledge spillovers
Market structure of internal economies of scale
- Big firms enjoy a cost advantage over small firms
- Incompatible with perfect competition - firms would lose money due to p = MC < AC
- Monopoly or Oligopoly
Market structure of external economies of scale
- Size of firm has no influence on average costs
- Industry consists of a large number of small firms under (almost) perfect competition
- Falling supply curve (Larger industry’s output, lower price firms are willing to sell)
Example of external economies of scale
Investment banking in NYC, Entertainment industry in Hollywood
What is the infant industry argument
Countries may have a potential comparative in some industries cannot initially compete with the well established industries in other countries
How does the infant industry argument relate to the learning curve?
Since infant industries are already behind the established industry, they should have some protections early on as they won’t be able to compete in the trade market as infants
Why is the infant industry argument criticized?
- Not a good idea to move into industries that will have a comparative advantage in the future
- Protecting manufacturing does no good unless the protection itself helps make industries competitive
What is strategic trade policy?
A trade policy environment, where decision makers are aware that the actions they take are independent
Decision makers include: firms, government firms and government
What is a Cournot Duopoly?
When 2 competing firms set their output quantities to the same level
Main rules of the Cournot Duopoly
- 1 home firm 1 foreign firm
- Homogenous product
- Linear demand and constant marginal costs
- All production sold in a 3rd country
What is the HOS model?
Difference in relative prices under autarky is explained by differences in factor endowments
What is an example of the HOS model?
Canada and Finland export forestry products cause they have high capital endowments of wood
Consequences of HOS model
- Country intensely uses the factor of production it’s endowed with
- Tendency towards factor production equalization
Main bit explaining the Lerner-Pearce diagram
Shows factor combinations for the quantity of output for good 1 equivalent to 1 unit of money
What is the transformation curve
Max amount of commodity X that can be obtainable for any given amount of commodity Y and vice versa
What is the specific factors model?
Assumes an economy that produces 2 goods can allocate its labor supply between 2 sectors
What is an example of a specific factor example
Land
Capital
- These are immobile unlike labor which is mobile
