Lecture 5 - International Trade and the Environment

Question 1

Mention the 4 classic theories of International Trade

Answer 1

1) Mercantilism
2) Absolut advantage
3) Comparative advantage
4) Factor endowment theory

Question 2

Mention the 3 modern trade theories

Answer 2

1) Product life cycle
2) Strategic trade
3) National competitive advantage

Question 3

Labour productivity and Comparative Advantage - the Ricardian Model

Define Comparative Advantage and what it is based on

Answer 3

Based on opportunity cost = the value of the next best opportunity

= A country has a comparative advantage if it can produce a good (in terms of other goods) at a lower opportunity cost relative to another country

Question 4

Factor Endowment Theory/ The Heckscher-Ohlin model
What is emphasized in the model and what is comparative advantage determined by?

And when will a country import and export goods?

Answer 4

= Stresses the role of factor endowments- and factor intensity for understanding trade

Comparative advantage is determined by:
1) Factor abundance: the relative abundance in resourced (capital, labor)
2) Factor intensity: the intensity of factor use in production process i.e. textile industry = labor intensive

A country will:
1) Export: goods that are intensive in its relatively abundant factor
2) Import: goods that are intensive in its relatively scarce factor

Question 5

Explain how Economies of Scale affects Trade (3)

Answer 5

1) Trade need not be the result of comparative advantage - countries do not need to be different to trade with each other

2) Two similar countries can focus in producing each a range of goods: economies of scale menas they can produce these goods in large quantities at a low cost

3= Trade creates a larger integrated market with a greater variety of goods at a lower cost due to scale economies

Question 6

Explain the categories and stages of the Product Life Cycle Theory (Raymond Vernon)

Answer 6

Accounts for the changes in trade patterns over time.

Divided the world into 3 categories:
1) Lead innovation nation US
2) Other developed nations
3) Developing nations

3 stages of products:
1) New: commands a price premium
2) Maturing: more countries produce
3) Standardized: production moves to low cost

Question 7

Explain Strategic Trade Theory with 2 points

Answer 7

1) Suggests that strategic intervention by governments in certain industries can enhance their odds for international succes

2) Introduced in industries with First Mover Advantage = often highly capital intensive

Question 8

National Competitive Advantage (Porter)
How is it created + mention the 4 aspects

Answer 8

= Created through opportunities and pressures created by:

1) Resource endowment - natural and human

2) Sophistication and scale of domestic demand

3) Strategies, structure and rivalry of domestic competitors

4) Availability- related and supporting industries

Question 9

Mention the 2 types of trade barriers

Answer 9

1) Tariff barriers
2) Nontariff barriers (NTBs)

Question 10

What is the effect of Tariffs? (4)

Answer 10

1) Prices go up at home
2) Producers gain
3) Consumers loose
4) Government generates revenue

Question 11

Mention 3 positive and 3 negative ways that Free Trade impacts the Environment

Answer 11

Positive:
1) Comparative advantage = in terms of efficiency
2) The income effect = high income countries enact tougher environmental protection policies resulting in less pollution per unit.
3) Can promote environmentally friendly technologies

Negative:
1) The size effect: Larger economies promote more production and consumption of products that tends to cause large amounts of pollution
2) Increased pollution from transportation
3) Pollution havens: can shift production to countries with lower environmental standards or poor enforcement

Question 12

Explain the Environmental Kuznets Curve

Answer 12

Shows a hypothesized relationship between environmental damage and income per capita

1) Early stages of growth: pollution increases
2) Later stages of growth: High income leads to environmental improvement

Question 13

What is WTO relationship with the Environment? (3)

Answer 13

1) Promotes free trade

2) Recognize an exception for restriction of trade to ‘conserve exhaustible natural resources’ or to protect ‘human, animal or plant life and health’ (should apply equally to foreign and domestic firms)

3) However, still suspicious of ‘green protectionism’ = use of trade barriers to protect domestic industry from competition under disguise of environmental regulation