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intl trade > intl trade exam > Flashcards

intl trade exam Flashcards

1
Q

What is the gravity model

A

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

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2
Q

Other factors of gravity model

A
  1. Distance - ^distance between countries –> ^cost of supply chain – ^price
  2. Cultural affinity - Countries with cultural ties –> ^connection
  3. Geography - conditions between countries
  4. MNCs –> Can transfer G/S between bases –> ^X/M
  5. Boarders –> ^formalities/cultural difference –> ^costs (tariffs)
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3
Q

What is balance of payments

A

Accounts for a country’s payments to and receipts from foreigners

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4
Q

What is the structure of BOP

A

Current Acct + Capital acct + errors/omissions = Financial account

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5
Q

What is Net International Investment Position

A

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)

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6
Q

What is a current account surplus/deficit

A

Surplus X greater than M (e.g. Germany)

M greater than X (e.g. US)

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7
Q

Describe the twin deficit hypothesis

A

A government deficit and a CA deficit occuring at the same time

^Government tax cuts –> ^consumption by consumers –> DECREASE saving –> ^ gov borrowing from abroad

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8
Q

Role of a country’s current account

A
  • Shows signs and direction of a country’s intl borrowing/lending
  • Important aspect of a country’s net foreign assets and net positon
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9
Q

Role of a country’s investments (come back)

A
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10
Q

Norway J Curve question (short-term impacts)

A
  1. Materials and machines have to be imported to build oil platforms (^CAD)
  2. ^CAD – negative impact on financial account and the NIIP (doesn’t just mean a negative NIIP - it depends on previous NIIP levels)
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11
Q

Norway J curve question (long-term impacts)

A
  1. Oil can be produced and exported to other countries (^CA –> ^FA - due to ^Capital X)
  2. If investment works –> ^NIIP
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12
Q

Can a current account deficit be good?

A
  • 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
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13
Q

Comparative Adv definiton

A

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

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14
Q

Absolute Adv

A

When a country produces more volume of a good than another country (not necessarily based on opportunity cost like comparative adv)

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15
Q

Definition of law of one price

A

An assumption that once trade has begun, we expect a frictionless world (no trade barriers, no transport costs) with an equalization of prices

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16
Q

How is law of one price applied if price for identical good differs between countries

A

Arbitrage opportunity evens the prices over time

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17
Q

What is the arbitrage opportunity

A

Trader purchases good in cheaper market and sells it in more expensive market - over time prices would be aligned to equilibrium

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18
Q

What is the PPP

A

Part on curve representing production levels that cannot be attained given a country’s resources etc

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19
Q

What is absolute PPP vs relative PPP

A

Absolute: Statement about price and exchange rate LEVELS

Relative: Statement about price and exchange rate CHANGES

20
Q

Empirical evidence of PPP

A

Very weak for the absolute version in short run
Evidence only for relative in long run

21
Q

Reasons for failure of PPP

A
  1. Arbitrage is limited through trade barriers/transportation costs
  2. Commodity trade is negligable compared to capital transactions
  3. 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
22
Q

Japan and US graph and PPP discuss

A

Shows a correlation between exchange rate change and Japan US price level ration - indicating relative PPP

23
Q

What is the Big Mac index?

A

Compare’s each country’s exchange rate with hypothetical alternative: the rate that would equalize Big Mac prices around the world

24
Q

Motivation of Ricardo-Viner Model

A

Trade will affect different groups within a country differently

25
Q

Reasons why groups are affected differently under ricardo-viner

A
  1. Production factors are immobile between sectors within a country
  2. Sectors differ in their factor demands
26
Q

What does Ricardo-Viner model allow

A

Allows for the analysis of distributional conflicts within a country

27
Q

Internal economies of scale

A

Occurs when the cost per unit of output depends on the size of the firm

28
Q

External economies of scale

A

Occurs when cost per unit depends on size of industry

29
Q

How can a country disadvantaged in trade despite having increased economies of scale

A

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

30
Q

Causes of internal economies of scale

A

Better use of factories, learning effects

31
Q

Causes of external economies of scale

A

Specialised suppliers, labor pooling, knowledge spillovers

32
Q

Market structure of internal economies of scale

A
  • 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
33
Q

Market structure of external economies of scale

A
  • 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)
34
Q

Example of external economies of scale

A

Investment banking in NYC, Entertainment industry in Hollywood

35
Q

What is the infant industry argument

A

Countries may have a potential comparative in some industries cannot initially compete with the well established industries in other countries

36
Q

How does the infant industry argument relate to the learning curve?

A

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

37
Q

Why is the infant industry argument criticized?

A
  1. Not a good idea to move into industries that will have a comparative advantage in the future
  2. Protecting manufacturing does no good unless the protection itself helps make industries competitive
38
Q

What is strategic trade policy?

A

A trade policy environment, where decision makers are aware that the actions they take are independent

Decision makers include: firms, government firms and government

39
Q

What is a Cournot Duopoly?

A

When 2 competing firms set their output quantities to the same level

40
Q

Main rules of the Cournot Duopoly

A
  1. 1 home firm 1 foreign firm
  2. Homogenous product
  3. Linear demand and constant marginal costs
  4. All production sold in a 3rd country
41
Q

What is the HOS model?

A

Difference in relative prices under autarky is explained by differences in factor endowments

42
Q

What is an example of the HOS model?

A

Canada and Finland export forestry products cause they have high capital endowments of wood

43
Q

Consequences of HOS model

A
  1. Country intensely uses the factor of production it’s endowed with
  2. Tendency towards factor production equalization
44
Q

Main bit explaining the Lerner-Pearce diagram

A

Shows factor combinations for the quantity of output for good 1 equivalent to 1 unit of money

45
Q

What is the transformation curve

A

Max amount of commodity X that can be obtainable for any given amount of commodity Y and vice versa

46
Q

What is the specific factors model?

A

Assumes an economy that produces 2 goods can allocate its labor supply between 2 sectors

47
Q

What is an example of a specific factor example

A

Land
Capital
- These are immobile unlike labor which is mobile

intl trade (2 decks)

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