Test 1 Flashcards
Why does the gravity model work?
Large economies tend to have large incomes and tend to spend more on imports
Which things increase trade between two countries?
larger economies
historical ties
linguistic/or cultural affinity
mutual membership in preferential trade agreements
Characteristics of indifference curves
the slope of the indifference curve is the marginal rate of substitution
indifference curves are usually bowed towards the origin
indifference curves are downwards sloping when both goods are bads
Ceterus Paribus means we assume
factors besides those under consideration do not change
Top 3 US trade partners
Mexico, Canada, Japan…
Over the last 50 years, world production_____ and world trade____
increased, increased
International economics _______use the same fundamental methods of analysis as other branches of economics, because
the motives and behavior of individuals are the same in international trade as they are in domestic transactions
The demand curve for beverages slopes downward because
when the price of beverages falls, consumers buy more beverages
The supply curve for beverages slopes upward because
when the price of beverages falls, producers make less beverages
Over the last 50 years, U.S. imports…
increased more than exports
One of the main actions of the Organization of Petroleum Exporting Countries in 1973 was to
reduce oil supply, causing world oil prices to rise
A drop in the price of beverages causes
a movement along the beverage deman curve
Suppose a Pepsi soda machine and a Coca Cola machine were sitting right next to each other and they both charged $1 for a bottle of their own soda. If Coca Cola raised its price to $1.25 we might expect that the demand curve…
the demand curve for Pepsi would shift to the right.
Factors that cause the PPF to shift out
Discovery of new oil fields in Texas
Immigration
New manufacturing technologies
In a model with only chips and beverages, the price of beverages is defined as
the number of chips you have to give up to get one more beverage
True or False: Migration between countries is allowed in the Ricardian model
False
True or False: the Ricardian model has one factor of production
True
True or False: there is no money in the Ricardian model
True
True or False: Factors are perfectly mobile between sectors in the Ricardian model
True
True or False: Indifference curves are downwards sloping if both goods are good
True
True or False: Indifference curves can cross
False
True or False: A consumer’s happiness is equal everywhere along an indifference curve
True
True or False: Most indifference curve analysis assumes that more of either good increases happiness
True
The Ricardian model illustrates how gains from trade can emerge from….
differences in production technology across countries
In the Ricardian model, workers are better off if
real wages go up
In the Ricardian model, technology is:
the number of workers that it takes to produce one unit of each good
In the Ricardian model, the pattern of trade is determined by:
comparative advantage, autarky prices, and autarky opportunity costs
The main point of the Ricardian model
to show how comparative advantage leads to gains from trade
The main difference between the Ricardian model and the Heckscher Ohlin model is
the number of inputs
If we know that the capital-labor ratio in aircraft is higher than the capital-labor ratio in clothing, the correct characterization of the aircraft industry is
capital intensive
The main reason that Mexico’s wages are lower than wages in the US is most likely that
Mexico has less capital per worker than the US
When there is one factor that is equally productive in both goods, the production possibilities frontier is -
a straight line
China’s wages are lower than US wages.
Mexican wages are lower than US wages.
Canada’s wages are about the same as US wages. If capital is the same price in all countries, which of the following statements is most consistent with the Heckscher-Ohlin theorem?
The US imports labor intensive goods from China
Which of the following models best demonstrates that differences in tech across countries determines comparative advantage?
Ricardian
The Stolper-Samuelson theorem predicted that in the US, NAFTA would
increase earnings of capital owners but lower workers’ wages
The main difference between the Heckscher-Ohlin model and the Specific Factors model is
the Specific Factors model describes the short-run gains from trade and the Heckscher-Ohlin model describes the long-run gains from trade across different groups
Which 2 models help us understand how some groups gain from trade while others lose from trade?
Heckscher Ohlin and Specific Factors
Which theorem describes a long-run relationship between product prices and factor prices?
The Stolper-Samuelson Theorem
In trade theory, a “small country” is one that
takes the world price as given
Which theorem describes a long-run relationship between factor endowments and production?
Rybczynski Theorem
Cuban immigrants did not change wages in the 80s - this is consistent with which theorem?
The Factor Price Equalization Theorem
The best theorem for trying to understand if inequality is liked to US trade is:
The Stolper-Samuelson Theorem
If we wanted to know if changes in apparel production were related to immigration, the most appropriate theory would be
Rybczynski (because it deals with output quantities/production over endowments/amount of labor)
Which model is least likely to be supported by available data?
Factor Price Equalization
If one good uses relatively more of factor A than Factor B,
we can’t say anything about factor abundance or factor intensity of this good
In the large country supply and demand model, an increase in supply in the exporting country
would cause the world price to fall
Factor Price Equalization
different countries have different factor supplies. Some are more labor abundant and some are more capital abundant, so in a labor abundant country, capital is more expensive before trade. After trade, in the labor abundant country, the price of the labor-intensive good will increase because there is an increase in the demand for labor. Then, the price of labor will rise because they are making more of the labor intensive good. Wages will therefore begin to converge.
Rybczynski
Increase in the endowment of labor causes production of the labor intensive good to increase and the production of the capital intensive good to fall.
Stolper-Samuelson
An increase in the price of the labor-intensive good causes wages to go up in real terms and r (the price of capital) to fall in real terms. The capital-intensive good does the opposite.
3 Theorems that are part of HO
FPE, SS, Ryb
Long Run theorems
HO - FPE, SS, and Ryb
Why do countries trade?
because prices are different
