Intro and Trade Theory (Lecture #2)

Question 1

def. trade

Answer 1

voluntary exchange of goods, services, assets, or money between one person or org and another

Question 2

def. int’l trade

Answer 2

trade between residents of two countries

Question 3

Why does int’l trade occur?

Answer 3

• 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

Question 4

What happened ~2000 that caused a big increase in trade?

Answer 4

China entered WTO

Question 5

what caused a decline in trade in the 2000s?

Answer 5

2008 Recession due to the collapse of the housing market

Question 6

In general, what did early country-based trade theories focus on?

Answer 6

• focus on the individual country
• useful for describing trade in commodities
• price is an important component

Question 7

in general, what do modern firm based trade theories look at?

Answer 7

• 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

Question 8

Describe mercantilism

Answer 8

• ~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

Question 9

why is mercantilism still considered today?

Answer 9

it benefits certain members of society

-can be politically attractive to people/companies in power, such as those that serve the market or export

Question 10

Why is mercantilism not ideal?

Answer 10

low quality, low quanitity, high price goods

• consumer loses
• also bad for consumers because of paying tax and subsidies

Question 11

describe the theory of abosulte advantage

Answer 11

-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

Question 12

describe Adam Smith’s critiques of mercantilism

Answer 12

• 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

Question 13

describe comparative advantage

Answer 13

• 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

Question 14

What is the problem with ultra-specialization?

Answer 14

if there is a downturn in that commodity, whole country can severely suffer (ex. oil countries)
–not a diversified economy

Question 15

describe relative factor endowments

Answer 15

• 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

Question 16

What is the leontif paradox?

Answer 16

• 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

Question 17

What is the theoretical development of modern firm-based trade theories?

Answer 17

• 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

Question 18

Describe Linder’s Country Similarity Theory

Answer 18

• 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

Question 19

def. interindustry trade

Answer 19

exchange of goods produced by one industry in country A for goods produced by a different industry in country B

Question 20

def. intraindustry trade

Answer 20

trade between two countries of goods produced by the same industry

Question 21

describe new trade theory

Answer 21

• 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

Question 22

def. economies of scale

Answer 22

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

Question 23

What hapens when economies of scale are important?

Answer 23

firms are particularly aggressive in expanding beyond their domestic markets