L1: Measuring Globalisation

Question 1

openness rate

Answer 1

simplest index of globalisation

(X+M)/Y

Question 2

globalisation

Answer 2

measured by economists as a impressive rise in levels of trade openness

Question 3

vertical integration

Answer 3

trade in intermediate products as opposed to to final products

Question 4

3 main sources of globalisation

Answer 4

1. fall in transport costs (infrastructures, equipment, logistics)
2. fall in communication costs (telephone, internet, planes) - technological progress
3. fall in trade barriers (GATT/WTO, regional agreements)

Question 5

GDP

Answer 5

value-added concept (sum of value added))

Question 6

exports and imports

Answer 6

gross value concept

Question 7

value-added exports

Answer 7

import manufactured goods, export it with an added value which is how they export more than they import

Question 8

gross value concept

Answer 8

value of the good including all the things within the good itself

Question 9

fragmentation to exports-to-GDP ratios

Answer 9

the more fragmentation of the production process, the more you look at exports that have high value but low value added - the more you increase the exports-to-GDP ratio

Question 10

the world is flat (Thomas L. Friedman)

Answer 10

globalisation is over, distance and borders don’t matter anymore

Question 11

gravity empirical analysis

Answer 11

1. national borders largely reduce trade
2. distance also has a large effect on all sort of flows (goods, services, capital, migrations, air traffic, internet…)

Question 12

gravity model

Answer 12

T = (A x Yi x Yj)/Dij
T as trade between countries i and j
A as a constant
Yi as the GDP of country i
Yj as the GDP of country j
Dij as the distance between countries i an dj

Question 13

why does trade occur?

Answer 13

different countries have different abilities to produce different goods for beneficial exchange
differences across countries in labor, labor skills, physical capital, natural resources, and technology

Question 14

economies of scale

Answer 14

larger scale of production is more efficient

Question 15

Ricardian model

Answer 15

theory of comparative advantage

differences in the productivity of labour (due to differences in technology) between countries

Question 16

Heckscher-Ohlin model

Answer 16

theory of comparative advantage

differences in endowments of factors of production (labor, capital, land, etc.) between countries

Question 17

gains from opening to trade in Ricardo

Answer 17

1. specialisation gains - optimise the use of scarce resources by specialising countries in what they do best , production is more efficient, increase in world production
2. exchange gains - increase satisfaction of consumers by separating production structure from structure of consumption in a country, increases world consumption and therefore utility

Question 18

comparative advantage definition

Answer 18

a country has a comparative advantage in a good when its relative productivity for this good (with respect to other goods) is higher than in the other country

Question 19

assumptions of Ricardo

Answer 19

2 countries
2 goods/sectors
1 production factor - labour
production technology differs across countries
labor moves freely across sectors, but not at all across countries
identical factor endowments
constant returns to scale
no distortion, perfect competition
identical preferences

Question 20

a (in an equation)

Answer 20

technical coefficient or unit input coefficient - amount of labour needed to produce one unit of the good

inverse of productivity, which is output divided by the number of people that produce that amount of output

Question 21

PPF

Answer 21

set of possible production combinations that achieve full employment of factors

Question 22

slope of the PPF

Answer 22

MRT (marginal rate of transformation)
opportunity cost of producing more X in terms of Y
reflects a country’s comparative advantage

Question 23

MRT in Ricardo

Answer 23

constant, because productivities are constant - only one factor of production so always the same cost

Question 24

perfect inter-sectoral mobility with comparative advantage in Ricardo means that …

Answer 24

wages are equalized at w

Question 25

how to find a country’s absolute advantage on a PPF diagram?

Answer 25

distance between the PPF and the origin of the diagram reflects the country’s absolute advantage

Question 26

what happens with regards to price and demand when a country opens to trade in Ricardo?

Answer 26

consumers re-allocate their demand towards the country with better relative price: prices tend to converge (perfectly in the ricardian model)

Question 27

conclusions from Ricardo

Answer 27

1. trade based on differences in relative productivities (technology)
2. trade is inter-industry: exported good ≠ imported good
3. free trade means an increase in ­world production
4. free trade = positive sum game
5. no country loses from opening up to trade (pareto optimal) but the gain from trade is not equally shared - small countries gain more (openness affects less adversely their terms of trade)

Question 28

wages in the Ricardian model

Answer 28

autarkic wages reflect labour productivity

free trade wages reflect productivity in the sector of specialization

Question 29

wage differences between countries depend on …

Answer 29

difference in productivities between the two countries

world relative price of the good exported by each country

Question 30

relative productivities determine …

Answer 30

specialisation

Question 31

absolute productivities determine …

Answer 31

relative purchasing power

Question 32

absolute advantage comes from …

Answer 32

differences in the stock of human capital in the economy, the technological level, institutions, etc.

Question 33

RCA

Answer 33

share of sector k in country i’s exports / share of sector k in world exports

Question 34

absolute advantage definition

Answer 34

a country has absolute advantage in a good if its productivity for the production of that good is higher compared to other countries