Lec 7: Why countries trade

Question 1

Why do countries trade?

Answer 1

1) difference in factor endowment
- natural resources
- climate
- labour
- capital/tech

2) other reasons to trade
- intra-industry or intra-firm trade
- agglomeration economies

Question 2

What are Mutual gains from trade?

Answer 2

when products are redistributed
such that countries end up with a combination of goods
better adapted to their preferences than what they had
before

Question 3

When does a country have an absolute advantage over another country in the production of a good?

Answer 3

if it can produce that
good using smaller quantities of resources than can
the other country

Question 4

Should a country still consider trading with another country if it has an absolute advantage in the production of all goods?

Answer 4

yes. countries can still gain from trading products for which they have a comparative advantage.

Question 5

What is the slope of the production possibilities frontier?

Answer 5

the opportunity cost. it sets the boundaries for which countries want to trade with each other

Question 6

What is the arbitrage process?

Answer 6

negotiations between countries, yields an exchange rate

Question 7

What are the 4 pillars of competitive advantage?

Answer 7

Porter’s 4 pillars:
- Factor conditions (LLK, technology, infrastructure)
 Demand (market) conditions
 Supporting industries
 Firm strategy, structure, competition