Lecture Notes Flashcards
Explain the gravity model of trade
The trade level between two countries depend on the two economies size as well as the distance between them, a constant is also added
What does the Rickardian model pose as the reason for trade
Different productivity in different sectors leading to oppertunity cost
What does the Heckscher-Ohlin model pose as the reason for trade
Different supply of factors
What gives a country comparative advantage
The ability to produce a good at lower opertunity cost
What are the assumptions of the rickardian model
Two countrues, 2 goods, 1 factor of production (labor), diferent productivity in diferent sectors
How do you calculate oppertunity cost
One good / other good, how many good 2 you loose for 1 good 1
What are the assumptiions of the specific factor model
Two entities, Two goods, two specific factors, one mobile factor and the production fucntion has decreasing return to the movable factor
What does decreasing marginal returns to labor mean
That the more labor you add the less you get out of it although you still gain something
The oppertunity cost increases the more a country specializes according to the specific factor model
Yes if the return to the movable factor is marginal
Why is free trade resisted according to the specific factor model
Becouse rare factor owners loose, agregate gain though so they could be compensated
What are the assumptions of the Heckscher-Ohlin model
2 nations, 2 goods, 2 factors, differing supply of factors, production of goods require different combination, factors can move between sectors, deminishing returns, same inherent productivity
The production along the possibility fronteir depends on price in all models
True
What is the effect of changing prices of factors in the Heckscher-Ohlin model
What is increased will be produced more and purchasing power of factor owners is increased to the detriment of all other factor owners, Rybczynskis theorem
What is exported according to the Heckscher-Ohlin theorem
Goods that are intensive in factors in which the nation is abundant
The Heckscher-Ohlin theorem holds when other factors such as tecknology are held constant
true
There are mobile factors in the Heckscher-Ohlin model
False
In the specific factor model a price change has an abigous effect on the owners of a movable factor
true
What are the assumptions of the general trade model
two countries, two goods, smouth bowed production possibility curve, countries differ in factors and productivity and a country can supply relative to world supply creating different terms of trade
What is exported according to the general trade model
Exports that the country has a comparative advantage in like the rickardian model
What is terms of trad
price of exports divided by price of imports
If terms of trade improve you gain more imports for your exports
true
How do you get comparative advantage in the general trade model
You can produce for cheaper than world average price in one sector
What is the source of growth in the general model
Productivity improvements or increased abundance in factors
How does export biased growth effect terms of trade
It deteriorates it
Small countries can improve their terms of trade using tariffs
no, only large countries and even they are dependent on a lack of retaliation
Internal economics of scale leads to imperfect competition
True
What are the reasons for external economies of scale
Labor market pooling, specialized subcontractors and dissemination of knowledge
Economies of scale is when there is decreased overall cost as production increases
false, it is per unit cost that have to decrease
Economies of scale lead to lower prices everyware
True
Give fore reasons for the infant industry argument
- Economies of scale and 2. dynamically increasasing returns as when advancing up the learning curve might give locations with a head start an otherwise unbeatable advantage. Market failures like the 3. problem of apropriation and 4. insuficient capital markets might lead to unrealised potential
When does a monopoly stop producing
When marginal costs equal marginal revenue
When does an oligopoly stop producing
When it is strategically good according to game theory
When does monopolistic commpetitors stop producing
When marginal costs equal the price
When are companies price takers
When there is perfect competition
In oligopolies all other companies prices are taken as given and wont change by one companies actions
No, that is in the case of monopolistic competition
Monopolistic competative firms produce less when there is increased competition
True, or rather they cannot sell as much for the same price
If a country opens a market characterised by monopolistic competition up to trade the amount of companies in the country will sink
Yes, the weak are weaned
Why is there intra industry trade in markets characterised by monopolistic competition
Becouse the products are diferentiated
Intra industry trade is based on comparative advantage
False
Small countries have more to gain from free trade
True, they only get efficiency loss from tariffs
Smaller companies gain more from opening up to trade
False larger multinationals gain the most as they are more efficient with their economies of scale, they gain from bigger markets while the small loose to the increased competition
Profitability diferences exhist without trade barriers
True, also with them though
What is the diference between specific sum tariffs and ad valorem tariffs
ad valorem ar in percentage of value while specifics are a specific number
A tariff can create an efficiency loss and a terms of trade gain in large countries
True
Give five arguments for free trade
Efficient allocation of resources, economies of scale, encentivices innovation, less corruption and rentseeking waste on liscences and it sets a political presedent
Market failures like poor financial markets and the problem of apropriation are the only valid reason for infant industry protection
True, according to our education
What is Rodricks trilemma hypothesis
That a country must choose 2 of democratic principles, globalization and national soverignty. Makes little sense but a hypothesis
What has worked historically to develop countries import substitution or export led growth
Export led growth like in asia
What is indirect nominal exchange rate
foreign / domestic -> exchange rate (not used in this corse)
What is direct nominal exchange rate
domestic / foreign -> exchange rate. So when there is a depreciation the exchange rate increases
If there is a depreciation you have to pay more for foreign imports
True
A domestic depreciation is the same as a foreign apreciation
True
Apreciation deteriorates terms of trade
No it makes imports cheaper
The nominal exchange rates depends on the expected return on fainancial assets in the country
True, in the short run
What is the interest parity condition
That the rate of return must be equal to foreign rate of return plus the expected rate appreciation of the exchange rate
What is the effect of a contractionary monetary policy at home
A short term depreciation but long term apreciation if not temporary
What are the effects of a contractionary monetary policy abroad
A short term apreciation but long term depreciation if not temporary
Real demand for money is a function off…
interest rate and national output aka GDP
How is demand effected by increased interest rates
It decreases demand
How is increased output effecting demand
it increases it
What happens when monetary policies are expansionary
Money supply increases which decreases interest rate
The foreign exchange market is effected by the money market
True, depreciating value increases the exchange rate
Price levels are constant in the short term and interest rates depend on the money supply
True
In the long run output and interest rates are effected by the money supply
False
In the long run prices are increased by monetary expansion
true, not interest and output
What is absolute purchasing power parity
That domestic prices are the same as foreign prices times the exchange rate
What is relative purchasing power parity
That exchanfe rate diferences are due to inflation diferences
What is the monetary aproach to the exchange rate
That the exchange rate is domestic divided by foreign money supply
Higher money supply leads to increased exchange rate accordinng to PPP
True
Why does PPP fail
Demand is diferent in diferent regions, there are barriers to tarade and imperfect competition
What is the real exchange rate
the exchange rate times foreign divided by domestic price diferences aka how many foreign goods baskets can you get for one domestic
Terms of trade decreases when there is a real depreciation
True
The monetary aproach states that the nominal exchange rate depends on fiscal factors in the long run
No, monetary
Permanent increase in productivity creates depreciation
True
What is the Marshall Lerner condition
Exports increase with depreciation
GDP increases with deprciation in the short run
True
How does the money market and foreign exchange market balance themselves
increased output increases rate of return which lowers the exchange rate through an apreciation which lowers demand and thus decreases output swinging back the pengelum
Fiscal expansion apreciates the exchange rate
Yes by temporarily increasing output
Monetary expansion depreciates exchange rate
True
Fiscal policy is more powerful when exchange rate is fixed
True, it is not as bad for exports then
Devaluation decreases the risk of a balance of payment crisis
False, when it happens once people think it may happen again and move out
How do you construct a world relative supply curve
If there are two goods at first one country moves all its production to that sector when the price is over the relative oppertunity cost, when the price reaches above the oppertunity cost of the other country both put all their means to produce that good
Decreased world demand for import improves terms of trade
True
What is rent seeking
When countries compete to host monopolistic industries
What is beggar thy neighbour policies
Trade war
A fiscal expansion decreases the current account
Yes it comes at the cost of exports
