Quiz 1 prep Flashcards
What is defined as “Voluntary exchange of goods, services, assets, or money between one person or organization and another”?
Trade
______________ trade is trade between 2 countries
International
What are 3 reasons for trade to happen?
1 – Higher quality
2 – Less expensive products
3 – More quantity
Exports spark additional _____________ activity
economic
Trade improves __________
competitiveness
What are the country based trade theories?
- Mercantilism
- Absolute advantage
- Comparative advantage
- Relative factor endowments
Which trade theories are:
- Focused on the individual country
- Useful for describing trade in commodities
- Price is an important component of the customer’s purchase decision
Early country based trade theories (INTER)
Which trade theories are:
- Focus on the firm’s role in promoting international trade
- Useful in describing patterns for trade in differentiated goods
- Brand Name is an important component of the customer’s purchase decision
Modern firm-based theories (INTRA-industry)
____________ is a 16th century economic philosophy that maintains that a country’s wealth is measured by its holdings of gold and silver
Mercantilism
According to mercantilists, a country’s goal should be to enlarge these holdings by promoting _________ and discouraging ________
- exports
- imports
What are modern mercantilist supporters called?
Neo mercantilists or protectionists
What is another name for absolute advantage theory?
Adam smith’s theory
What is defined as “export those goods and services for which it is more productive than other countries are and import those goods and services for which other countries are more productive than it is”?
Absolute advantage theory
Adam Smith intellectually countered the basis of ____________; _______________ weakens a country – in the process of avoiding imports at all costs, it squanders a country’s resources producing goods it is not suited to produce
Mercantilism
Smith advocated free trade among countries for which 2 reasons?
- Enlarges a country’s wealth
- Free trade enables a country to expand the amount of goods and services available to it by specializing in the production of some goods and services and trading for others
What is another name for the comparative advantage theory?
David Ricardo’s theory
What is defined as “Relative productivity differences – the difference between absolute and comparative advantage occurs because comparative advantage incorporates the concept of opportunity cost in determining which good a country should produce “?
Comparative advantage theory
If a country possesses the absolute advantage in both products, under the theory of absolute advantage, no trade would occur, but under the comparative advantage, __________
trade should still occur
“The opportunity cost of a good is the value of what is given up to get the good” means:
The ___________ __________ theory explains that:
- You are better off specializing in what you do relatively best
- Produce (and export) the goods and services you are relatively best able to produce
- Buy other goods and services from people who are relatively better at producing them than you are
Comparative advantage
What are the two theories within relative factor endowments?
- Heckscher Olin theory
- Pattern of comparative advantage
Which theory from relative factor endowments is defined as:
- Export products that use relatively abundant factors of production
- Import products that need relatively scarce factors of production
Pattern of comparative advantage
Which theory from relative factor endowments is defined as “A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance”?
Heckscher Olin theory
_________ ___________ (or types of resources) vary among countries
Factor endowments
Goods differ according to the types of factors that are used to ________ them
produce
Explain the Leontiff Paradox:
Wassily Leontief believed the US was a capital-abundant and labour-scarce economy, so according to the Heckscher-Ohlin theory, he reasoned that the US should export capital-intensive goods, such as bulk chemicals and steel, and import labour-intensive goods, such as clothing and footwear → Results were not consistent with the predictions of the Heckscher-Ohlin theory: US imports were nearly 30 percent more capital-intensive than were US exports
What are the three reasons firm based theories have developed?
- Growing importance of MNCs in the postwar international economy
- Inability of the country-based theories to explain and predict the existence and growth of intra-industry trade
- Failure of Leontief and other researchers to empirically validate Heckscher-Ohlin theory
Unlike country-based theories, firm-based theories incorporate factors such as _______, ___________, _______ ________, and ________ _________ into explanations of trade flows because firms, not countries, are the agents for international trade (the newer theories explore the firm’s role in promoting __________ & __________)
- quality, technology, brand names, and customer loyalty into explanations of trade flows
- exports and imports
What is defined as “the exchange of goods produced by one industry in country A for goods produced by a different industry in country B, such as the exchange of French wines for Japanese clocks”?
Interindustry trade
What is defined as “trade between two countries of goods produced by the same industry”?
Intraindustry trade
Which theory suggests “that most trade in manufactured goods should be between countries with similar per capita incomes and that intraindustry trade in manufactured goods should be common”?
Linder’s country similarity theory
_________ _________hypothesized that international trade in manufactured goods results from similarities of preferences among consumers in countries that are at the same stage of economic development
Steffan Linder
Which theory is particularly useful in explaining trade in differentiated goods?
Linder’s country similarity theory
What is defined as “automobiles, expensive electronics equipment, and personal care products, for which brand names and product reputations play an important role in consumer decision making”?
Differentiated goods
What is defined as “coal, petroleum products, and sugar, are those for which brand names and product reputations play a minor role at best in consumer purchase decisions”?
Undifferentiated goods
Who developed the new trade theory?
Helpman, Krugman, and Lancaster
What is defined as “economies of scale occur if a firm’s average costs of producing a good decrease as output of that good increases”?
New trade theory
Which theory can be defined as:
- The theory predicts that intraindustry trade will be commonplace
- Suggests MNC’s within the same industry, such as Caterpillar and Komatsu, Unilever and P&G, and Airbus and Boeing, will continually play cat-and-mouse games with one another on a global basis as they attempt to expand their sales to capture scale economies (Often they seek to harness some sustainable competitive advantage they enjoy as a mean of leveraging their own strengths and neutralizing those of their rivals)
New trade theory
What are two other forms of international investments, whereby residents of one country supply capital to a second country?
- Foreign Direct Investment
- Foreign Portfolio Investment
Which form of investment is described as:
- Passive holdings of securities
- Modern finance theory suggests that foreign portfolio investments will be motivated by attempts to seek an attractive rate of return, while reducing the risk that can come from geographically diversifying one’s investment portfolio
Foreign Portfolio Investment
Which form of investment is described as:
- Acquisition of foreign assets for the purpose of controlling them
- many forms, including the purchase of existing assets in a foreign country; new investment in property, plant, and equipment; and participation in a joint venture with a local partner
FDI
What are the 2 political factors that affect FDI decisions?
- Avoidance of trade barriers
- Economic development incentives
Which political factor for FDI decision is described as “Firms often build foreign facilities to avoid trade barriers, such as high tariffs on imported consumer electronic goods”?
Avoidance of trade barriers
Which political factor for FDI decision is described as:
- Most democratically elected government intend to promote the economic welfare of their citizens
- Those governments offer incentives to firms to induce them to locate new facilities, and provide jobs in their jurisdiction
Economic development incentives
What are the 4 supply factors that affect FDI decision?
- production costs
- logistics
- resource availability
- access to technology
What are the 4 demand factors that affect FDI decision?
- customer access
- marketing advantages
- exploitation of competitive advantages
- customer mobility
Describe protectionism:
Policies that affect the ability for producers to compete in your home market, and limit or enhance your company’s ability to sell abroad or acquire needed foreign supplies
Why do governments intervene in trade (to achieve what)?
- economic goals
- social goals
- political goals
While free trade is beneficial, in reality, all countries ___________ the flow of goods and services across their borders. Officials enact those trade policies they feel will best ___________ their nations and citizens– and perhaps their personal political longevity
- regulate
- protect
Policy makers are challenged by what and who?
- conflicting objectives
- interest groups
Proposed policies on trade spark debate amongst whom?
stakeholders– which include workers, owners, suppliers, and local politicians → those who are most directly affected tend to be loudest in voicing their concerns
______ _________ changes bring about winners and losers among counties, companies, and workers
Trade restriction
Gains to consumers from freer trade may come at the expense of __________ and _______
- companies
- workers
Looking forward there is likely to be both support for _______ _______, and also support for more _____________
- freer trade
- protectionism
What are the 4 economic rationales?
- Fighting unemployment
- Protecting infant industries
- Developing an industrial base
- Economic relationships with other countries
What are the 4 noneconomic rationales?
- Maintaining essential industries
- Promoting acceptable practices abroad
- Maintaining or extending spheres of influence
- Preserving national culture
Which economic rationale is defined as “trying to fix employment problems using trade policy can create new challenges– costs that are often associated with import restrictions include higher prices and higher taxes; governments must balance the potential for these costs with the benefits of creating new jobs”?
Fighting unemployment
What may be more effective in correcting unemployment problems?
fiscal and monetary policies
What can import restrictions lead to?
Trade wars (retaliation by other countries) that consist of back-and-forth threats on effective trading (e.g., tariff for tariff)
Import restrictions are less likely effectively retaliated against by whom?
Small economies
Import restrictions are less likely to be met with retaliation if?
implemented by small economies (big economies might not retaliate against tariffs from small/less powerful economies)
Import restrictions may decrease what?
export jobs because of price increases for components and because of lower incomes abroad
First presented by Alexander Hamilton in 1792, the “__________________” holds that a government should temporarily shield emerging industries in which the country may ultimately possess a comparative advantage from international competition until its firms are able to effectively compete in world markets
infant-industry argument
Why is government protection of import competition necessary?
to help certain industries evolve from high-cost to low-cost production
According to infant industry argument, production becomes more competitive over time because of increased economies of scale and greater work efficiency. Therefore:
if an emerging industry is protected during its infancy it has a greater change for success
Many developing countries use which argument as a rationale for implementing protectionist policies?
Protecting infant industries
production costs may never fall far enough to make an industry __________, making it important to clearly identify those industries with the _________________________
- competitive
- greatest chance for success
Countries that are trying to develop an industrial base may intervene in trade flows
to help improve?
competitive positioning
What are the 5 reasons countries promote industrialization?
- Brings faster growth than agriculture
- Brings in investment funds
- Diversifies the economy
- Creates growth in manufactured goods
- Reduces imports and promotes exports
Trade controls can be used to:
- improve the balance of payments
- gain fair access to foreign markets
- as a bargaining tool (believability and importance)
- control prices (avoid dumping)
Governments have to be careful when using trade restrictions to control prices because:
- If prices get too high, it could result in smuggling or substitution
- Similarly, if prices get too low, there is an incentive to produce less or to shift foreign production and sales
Trade restrictions can be used to prevent a practice known as _________ which involves exporting below cost or below home country prices, and to get foreign producers to lower their prices
dumping
According to the optimum tariff theory, a foreign producer will lower its prices if?
the importing company places a tax on its products
What is the essential industry argument?
protect essential industries so the country is not dependant on foreign supplies
Under the essential industry argument, countries must:
- Determine which industries are essential
- Consider costs and alternatives
- Consider political consequences
Import trade controls can be used to:
- promote changes in foreign countries’ political policies or capabilities
- As a foreign policy weapon
- pressure governments to alter their stances on a variety of issues (e.g., Human rights, Environmental protection)
Which noneconomic rationale does this describe?
Promoting acceptable practices abroad
