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ECON 337 > Midterm Review > Flashcards

Midterm Review Flashcards

1
Q

What drives trade politics in the Hecksher-Ohlin factor model?

A
  • Competition between factors of production
  • i.e., capital vs. (homogeneous) labor
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2
Q
  • What happens to wage and return to capital in the H-O factor model for a country abundant in capital?
  • Why?
A
  • The wage falls and capital rises.
  • The shrinking of labor-intensive industries releases a lot of labor; the expansion of capital intensive industries demands a lot of capital.
  • Thus, these prices change with the change in demand.
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3
Q

Fill in the blank: in the H-O factor model, the income of the scarce factor will {always, sometimes} {fall, rise} with trade.

A

The income of the scarce factor will always fall with trade.

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4
Q

Fill in the blank: in the H-O factor model, the income of the abundant factor will {always, sometimes} {fall, rise} with trade.

A

The income of the abundant factor will always rise with trade.

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5
Q

True or False: in the H-O factor model, wages between countries will always equalize.

A

True, by the Stolper-Samuelson theorem (applicable to H-O factor model)

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6
Q

True or False: in the H-O factor model, returns to capital between countries will always equalize.

A

True, by the Stolper-Samuelson theorem (applicable to the H-O factor model)

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7
Q

What is the Stolper-Samuelson theorem, according to Oatley?

A

It asserts the tendency for trade to cause factor prices to converge.

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8
Q

In the H-O factor model, who wants to limit trade?

A
  • The scarce factor: for example, in the U.S., this would be labor.
  • In fact, labor unions are usually protectionist in the U.S.
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9
Q

In the H-O factor model, who wants to expand trade/support globalization?

A
  • In the H-O factor model, the abundant factor wants to expand trade.
  • In the US the abundant factor is capital.
  • In fact, businesses and CEOs do lobby for freer trade in the U.S.
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10
Q

What is an important qualification to the H-O factor model?

A

It assumes labor is homogeneous.

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11
Q

The Hecksher-Ohlin model argues that ______ arise from differences in countries’ ________.

A

The Hecksher-Ohlin model argues that comparative advantage arise from differences in countries’ factor endowments.

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12
Q

When is an outcome Pareto optimal?

A

An outcome is Pareto optimal when no single actor can be made better off without at the same time making antoerh actor worse off.

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13
Q

What is a Nash equilibrium?

A

An outcome at which neither player has an incentive to change strategies unilaterally.

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14
Q

What is the following called:

An outcome at which neither player has an incentive to change strategies unilaterally.

A

What is a Nash equilibrium?

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15
Q
A
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16
Q

When does a person have a comparative advantage?

A

when they can produce a good at a lower opportunity cost compared to someone else.

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17
Q

What is trade integration?

A

the extent to which markets for goods and services are integrated.

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18
Q

What are some examples of non-tariff barriers?

A
  • Import quotas – limitation on the quantity of imports
  • Export restraints – limitation on the quantity of exports
  • Export subsidies – payment to a firm that ships a good abroad
  • Local content requirements – regulation requiring that specified fraction of a final good is produced domestically
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19
Q

What drove 19th century trade integration?

A

decline in transportation costs due to steamships, railroads, and canals.

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20
Q

Why might a PPF be curved?

A

increasing opportunity costs which arise under decreasing returns to scale

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21
Q

Where does one maximize utility given a PPF and consumer indifference curves?

A

MARGINAL RATE OF SUBSTITUTION
=
MARGINAL RATE OF PRODUCT TRANSFORMATION
MRS = MRT

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22
Q

Why is trade good?

A
  • There is a terms of trade benefit.
  • Our MRT (marginal rate of product transformation) increases…?
  • PPF curve shifts out…?
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23
Q

Why do countries trade? (General, short answer.)

A
  • they are different and there are gains to specialization and trade
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24
Q

Why do we not get complete specialization with trade?

A

Neoclassical general equilibrium trade model with 2 countries, 2 goods, 2 factors of production (e.g. capital and labor) and INCREASING opportunity costs.

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25
Q

Does freer trade lead to higher incomes?

A
  1. Possibly. A robust study shows an average increase of about 5%.
  2. The qualifications are that richer countries trade more, but there is a selection bias then.
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26
Q

What does it mean to be capital-abundant in the HO model?

A

Cost of capital relative to wages is lower

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27
Q

What are the costs of protectionism?

A
  1. In a large country like the US, a tariff raises the domestic price of a good (but through terms of trade, lowers the world price).
  2. Consumers lose everything in the trapezoid (a + b + c +d).
  3. Producers gain a.
  4. Governments of big countries gain c + e.
  5. Governments of small countries gain c.
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28
Q

What are four reasons protectionism might actually be good?

A
  1. Optimal tariff—for large countries with economic power, terms-of-trade benefit could outweigh efficiency losses.
  2. Infant industry—suppose industry already established in another country. Developing country might not be able to realize its comparative advantage in this industry because of the existing cost advantages of foreign firms.
  3. Strategic trade policy—protection can alter terms of competition to favor domestic over foreign firms and shift excess returns in monopolistic markets from foreign to domestic firms.
  4. Spillover effects—protect industry because its activities generate positive spillover effects for other individuals or industries.
29
Q

What are two bad reasons fronted for protectionism?

A
  1. National defense
  2. Balancing the balance of trade
30
Q

What is the HO theorem?

A

The proposition of the Heckscher-Ohlin Model that countries will have comparative advantage in, and therefore export, the goods that use relatively intensively their relatively abundant factors.

31
Q

What is factor mobility?

A

The ease with which labor and capital can move from one industry to another.

32
Q

Under the HO/factor model, what is the factor mobility?

A

Very high. Labor and capital can easily move from one industry to another.

33
Q

Who gains from trade in the RV/sector model?

A
  1. The factor of production that is specific to the export industry will win, as the relative price of the export good increases.
  2. That is, the export-oriented sector.
34
Q

What is Black’s Median voter theorem?

A

If members of a group have single-peaked preferences, then the ideal point of the median voter has an empty winset.

Or, a politician faced with two-choice decision should pick the optimal policy of the median voter.

35
Q

What is the equilibrium policy under majority rule with repeated referendums?

A

The equilibrium policy under majority rule with repeated referendums under these assumptions is the median voter’s preferred policy.

36
Q

What is the Stolper-Samuelson theorem, according to Scheve?

A

In the long run, when all factors are mobile, an increase in the relative price of a good will increase the real earnings of the factor used intensively in the production of the good and decrease the real earnings of the other factor.

37
Q

Given an increase in the relative price of an industry’s output, what will happen to real earnings?

A

It will increase the real earnings for the factor specific to that industry but will decrease the real earnings for the factor specific to other industries.

38
Q

In advanced industrial countries, who gains from trade in the specific factors model?

A

Because capital is abundant,

Capital AND labor specific to capital-intensive industries both gain from trade

39
Q

In a Nash equilibrium, would anyone unilaterally defect?

A

No.

40
Q

What does Mancur Olson argue about large groups and collective action?

A

then individuals have a dominant strategy not to contribute to the project.

  1. anonymous
  2. a single person’s contribution won’t matter much
  3. harder to punish
41
Q

Why are small groups better for collective action problems?

A
  1. more personal – can persuade
  2. individual contributions make more of a difference
  3. know who the slackers are, and can punish with ostracism
42
Q

Is asymmetry good or bad for large groups?

A

Good. Because large members can make a difference and are perceived to do so, they will find it in their interest to contribute and be under pressure to do so.

43
Q

What’s one way around a collective action problem?

A

Selective incentives to members that contribute may induce contributions.

44
Q

What is the central idea of GH?

A

Central idea is a mechanism of exchange between governments and lobbies where trade protection is exchanged for contributions.

45
Q

What are the assumptions of the GH model?

A
  • Small open economy
  • Specific-factors economic model—conflict is going to be between industries and between industries and consumers.
  • There is a non-traded good 0 which is produced one-for-one from labor only. This means the wage w=1.
  • Size of population is normalized to one. So total returns to labor are wL=1
46
Q

Who gets trade protection? (Short answer)

A

Organized sectors with large producers without too many imports

47
Q

Why are the bilateral agreements of GATT good for everyone?

A

But a “most-favored nation (MFN) clause” applied in that if a bilateral agreement reduced tariffs on a product, the lower tariff applied to all other members.

BUT Bagwell Steiner reading says something about this being a free rider problem. Solved by rules that allow exceptions when making agreements with the largest producers or the like, or ability to revise

48
Q

In terms of GATT nondiscrimination, what is national treatment?

A

prohibits the use of taxes, regulations, other domestic policies to advantage domestic over foreign firms

49
Q

In what round was the WTO created?

A

Created the World Trade Organization—GATT became a formal international institution.

50
Q

Why is the WTO better than GATT for dispute settlement?

A

Under GATT, a defendant could block actions.
Under the WTO, this cannot happen

51
Q

What is the effectiveness of the WTO dispute settlement mechanism?

A
  1. NOT forcing compliance.
  2. A deterrent effect –– allows countries to remove previous concessions
52
Q

Countries in a repeated Prisoner’s Dilemma might cooperate without an international institution like the GATT/WTO but such an institution may make it more likely. Why?

A
  • indefinite repeated interaction is reasonable.
  • DSM provides good information
  • Reciprocal tariff reductions ~ tit-for-tat
53
Q

What is the export mobilization story?

A
  • international institutions help countries cooperate over trade in the presence of political pressures for protection
  • governments value liberalization in other countries because it makes exporters happier. Trade agreements are attractive to governments because they facilitate mutual tariff reductions.
  • Countries join trade agreements because they lead to changes in trade policy that generate pareto improvements for governments relative to outcomes with unilateral trade policymaking–the Nash equilibrium.
54
Q

How does the GATT/WTO solve the problem identified by the terms-of-trade story?

A
  • Still PD game and so key features of institution previously identified—repeated interactions, reciprocity, and information—can all facilitate cooperation.
  • Key emphasis, however, is on reciprocity.
55
Q

What is the domestic commitment story?

A

emphasizes that a government facing political pressures may benefit from trade agreements which allow it to commit to no longer be influenced by domestic lobbies

56
Q

What might industries do if they think the government will protect in the future?

A

overinvest in sectors based on their anticipation of future protection.

57
Q

The domestic commitment story seems to contradict Grossman-Helpman. Why might the gov’t still want it?

A

While compensated for ex-post distortions, the government is not compensated for ex-ante distortions in the sectoral allocation of resources created by the anticipation of the government’s relationship with the lobby

58
Q

In the RV specific factors model, wage =

A

Wage = Price(good A) * MPL(good A)

59
Q
A
60
Q

What does the infant industry case for protection argue?

A

There are cases in which newly created firms will not be initially efficient, but could be efficient in the long run if they are given time to mature.

  • Why?
  • Economies of scale
  • Economies of experience
61
Q

What is a good equation to know for Grossman-Helpman?

A
62
Q

True or False: Strategic trade theory assumes a perfectly competitive market.

A

False. It assumes an oligopolistic competition.

63
Q

(feenstra)

In the HO model we assume what two things?

A

HO

  1. technologies are the same across countries
  2. countries trade because the available resources (land, labor, capital) differ across countries
64
Q

(feenstra)

With 2 goods, 2 factors, and 2 countries, HO predicts that a country will export _____

and import ____

A
  • HO
  • export the good that uses its abundant factor intensively
  • import the other good
65
Q

All other things equal, a state is more likely to invest greater resources fighting on behalf of national champions in industries externalities that can be ____

A

Internalized.

Congressional Budget Office mandate: external benefits must accrue in disproportionate measure within national boundaries

66
Q

Can we know whether workers are better off from trade in the RV model?

A

Not without knowing how much of each good workers prefer to consume.

When the relative price of either good changes, the real wage rises when measure in terms of one good but falls when measured in terms of the other good.

67
Q

What do we mean when we say foreign is labor abundant in the HO model?

A

We mean L*/K* > L/K.

68
Q

What is Leontif’s paradox?

A

The capital-labor ratio for US imports was higher than the capital-labor ratio for US exports.

69
Q
A

ECON 337 (4 decks)

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