Intro and Trade Theory (Lecture #2) Flashcards
def. trade
voluntary exchange of goods, services, assets, or money between one person or org and another
def. int’l trade
trade between residents of two countries
Why does int’l trade occur?
- more, better, cheaper
- both parties in the transaction benefit
- imports provide:
- -1. higher quality and/or
- -2. less expensive products
- -3. more quality
- exports spark additional economic activity
- improve competitiveness
What happened ~2000 that caused a big increase in trade?
China entered WTO
what caused a decline in trade in the 2000s?
2008 Recession due to the collapse of the housing market
In general, what did early country-based trade theories focus on?
- focus on the individual country
- useful for describing trade in commodities
- price is an important component
in general, what do modern firm based trade theories look at?
- differentiated goods (describes patterns of trade for these goods)
- focus is on firm’s role in promoting int’l trade
- brand name is an important component of the customer’s purchase decision
Describe mercantilism
- ~16th century economic philosophy
- as much gold and silver in vaults as possible
- lots of protectionism
- local producers serve local people
- no imports
- country’s goal is to encourage exports, and discourage imports
why is mercantilism still considered today?
it benefits certain members of society
-can be politically attractive to people/companies in power, such as those that serve the market or export
Why is mercantilism not ideal?
low quality, low quanitity, high price goods
- consumer loses
- also bad for consumers because of paying tax and subsidies
describe the theory of abosulte advantage
-promotes specialization (extreme specialization)
ie only produce what you are better at producing than others
-free trade among countries would enlarge a country’s wealth
-would expand the amount of goods and services available to it by specializing in the production of some goods and services (the ones it’s more productive making than other countries) and trading for the others
describe Adam Smith’s critiques of mercantilism
- Adam Smith had attacked the intellectual basis of mercantilism
- -said it weakens a country
- -in process of avoiding imports at all costs, squanders a country’s resources producing goods it is not suited to produce
describe comparative advantage
- David Ricardo
- answers the “What if you’re better than me at everything?”
- relative productivity differences
- -ie produce and export what you are relatively best at, import what others are relatively better at
- incorporates the concept of opportunity cost (the value of what is given up to get the good, usually time)
- trade will still occur even if one country has an absolute advantage in all products
What is the problem with ultra-specialization?
if there is a downturn in that commodity, whole country can severely suffer (ex. oil countries)
–not a diversified economy
describe relative factor endowments
- Hecksher-Ohlin theory: a country will have a comparative advantage in producing products that intensively uses resources (factors of production) it has in abundance
- -since factor endowments vary among countries, goods differ as well
- pattern of comparative advantage
- -export products that use relatively abundant factors of production
- -import products that need relatively scarce factors of production
What is the leontif paradox?
- H-O theory tested empircially after WW2 by Leontief (economist)
- though the US was capital abundant and labour-scarce (based on theory) and would export capital abundant resources, and import labour-scarce resources
- reality was the opposite
What is the theoretical development of modern firm-based trade theories?
- for differentiated products
- intraindustry (country-based theories don’t explain this)
- growing importance of MNCs is postwar int’l economy
- incorporate factors like quality, tech, brand names, and customer loyalty into trade flow explanantions
- firms as agents for international trade, not countries
Describe Linder’s Country Similarity Theory
- looks at per capita income, if similar, more likely to be able to trade differentiated goods in the same industry (intraindustry trade)
- manufactured goods would be traded between countries with similar per capita income
def. interindustry trade
exchange of goods produced by one industry in country A for goods produced by a different industry in country B
def. intraindustry trade
trade between two countries of goods produced by the same industry
describe new trade theory
- economies of scale occur if a firm’s average costs of producing a good decrease as output of that good increases
- the existence of economies of scale predict intraindustry trade will be commonplace (because firms want to reach bigger markets)
- suggests MNC’s within the same industry will continue to play cat-and-mouse games on a global basis in an attempt to expand sales to capture scale economies
- —they want sustainable competitive advantage
def. economies of scale
focus on a couple things to save money (more efficient, effective)
-occur if a firm’s average costs of producing a good decrease as output of that good increases
What hapens when economies of scale are important?
firms are particularly aggressive in expanding beyond their domestic markets
