Trade and comparative advantage

Question 1

globalisation d

Answer 1

growing interdependence of countries resulting from increasing integration of: trade, finance, people, ideas in one global marketplace

Question 2

reasons for globalisation

Answer 2

after ww2, technological advancements (lower cost of transport, communication, computation), liberalisation of trade and capital markets

Question 3

evidence of globalisation

Answer 3

boosted econ growth in east asian economies such as hong kong and Singapore,
access of producers to larger international markets (division of labour, competition),
technology spill overs from trading partners through knowledge embedded in imported production

Question 4

what is an example of a case study for globalisation and explain what happened there

Answer 4

Malaysia,
1970s was an export processing zone in which free trade was permitted provided that all goods produced within the zone are exported,
attracted japanese and american electronic manufacturers to move production processes,
chance to move from agriculture to manufacturing

Question 5

problems with globalisation

Answer 5

global warming and deforestation

Question 6

what are two reasons that countries trade

Answer 6

countries different, agree to produce goods and services that they do relatively well,
economies of scale, can produce each at larger scale and more efficiently

Question 7

what are some pros of globalisation

Answer 7

promotes global economic growth,
creates jobs,
makes companies more competitive,
lowers prices for consumers

Question 8

what are some cons of gobalisation

Answer 8

social injustice,
unfair working conditions (child labour, poor living and working conditions, slave labour wages),
lack of concern for the environment,
threat of corporations ruling the world as they gain power through globalisation

Question 9

what does autarky mean

Answer 9

no international trade

Question 10

what does relative price mean

Answer 10

price of one good measured in units of another good

Question 11

absolute advantage d

Answer 11

when a country can produce a unit of a good using less labour than another country

Question 12

comparative advantage d

Answer 12

a country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries

Question 13

write down the table/grid thing for the labour requirements of a Ricardian model of comparative advantage (star)

Answer 13

country X Y
A αx αy
B βx βy,
i hope that has come through formatted correctly

Question 14

what is the production possibility frontier for Ricardian model of comparative advantage for countries A and B

Answer 14

La = αxX + αyY,
Lb = βxX + βyY

Question 15

for ricardian model of comparative advantage (below), what is the requirement for A to have a comparative advantage in X (star),
country X Y
A αx αy
B βx βy,

Answer 15

A has comparative advantage in X if,

αx/αy < βx/βy

Question 16

when the countries go from autarky to international trade (think of the diagram where there is world price), what is the equilibrium price always

Answer 16

the equilibrium price is always between the two autarky prices so you work out the relative prices of the goods for each country and the equilibrium price will be between those prices, equilibrium price represented by p*

Question 17

what is a case study of a country moving from autarky to free trade

Answer 17

japan moved from autarky to free trade in 1870 and their real national income increased by 65% in 15 years

Question 18

what is the heckscher ohlin theory

Answer 18

countries with lots of capital should focus production on capital intensive goods,
countries with lots of labour should focus on producing goods that are labour intensive

Question 19

what is the mathematical representation of the heckscher ohlin theory

Answer 19

Ka/La > Kb/Lb then country A should focus on capital intensive goods,
basically you have to work out the capital-labour ratios

Question 20

what are some assumptions of the Ricardian model

Answer 20

level of technology fixed for both countries (although can differ between them),
internal and external transportation costs are zero,
unit costs of production are constant,
perfect competition

Question 21

what happens to the relative prices of wine and cloth when the countries are open to trade *

Answer 21

in portugal, the relative price of wine will rise because cloth is arriving from england and the english are demanding portugese wine, thus the price will rise above 1W:0.89C toward more cloth being given up to obtain a unit of wine. the pretrade ratios of 1W:1.2C in england and 1W:0.89C in portugal thus converge towards each other through trade

Question 22

how did Ricardo express the gains from trade

Answer 22

in terms of labour time saved (because he viewed trade essentially as a mechanism for reducing the outlay of labour necessary for obtaining goods

Question 23

the closer the terms of trade are to a country’s autarky price ratio, the ______ the gain for that country from international trade

Answer 23

smaller

Question 24

when does a comparative advantage exist

Answer 24

whenever the relative labour requirements differ between the two commodities

Question 25

how do you show the gains from trade if given values and terms of trade and how much is traded *

Answer 25

you work out the number of labour hours required to produce the amount that they have after trade and compare it with how many hours it would have taken in autarky (for example would say they have 9.5 labour hours worth of stuff but due to trade it only took them 9 hours)

Question 26

how do you show the increase in consumption given by free trade *

Answer 26

draw consumption possibility frontiers (the consumption possibility frontier under autarky is the same as the production possibility frontier

Question 27

how do you work out the intercepts on the consumption possibility frontiers after trade is allowed *

Answer 27

work out which good each country will specialise in,
then one on axis it will be the maximum quantity of the good it can produce (this will be the good that it has a comparative advantage in) and on the other axis it will be if all of the good (the one that the country produces and has an advantage in) is traded for the other commodity which is not domestically produced

Question 28

how do you work out the gradient of the new production possibility frontier after trade *

Answer 28

the gradient will be the new terms of trade (for example 2.5yd/cloth as opposed to 3yd/cloth)

Question 29

what does the Ricardian model not include

Answer 29

exchange rates,
transport costs,
costs of wages

Question 30

what is the equation for whether countries trade once wages are included *

Answer 30

Wa * aa1 < Wb * ab1 * e,
wages in country a * labour-input requirements to produce good 1 in country a < wages in country b * labour input requirements to produce good 1 in country b * exchange rate (as defined country A currency / country B currency)