Trade theory

Question 1

What is international trade?

Answer 1

International trade is trade between the residents (individuals, businesses, nonprofit organizations, or other forms of associations) of two countries. Trade involves the voluntary exchange of goods, services, or money.

Question 2

Why does intl trade occur?

Answer 2

International trade occurs because the parties to the transaction believe that they benefit from the voluntary exchange

Question 3

What is the difference between comparative advantage and absolute advantage?

Answer 3

The difference between absolute advantage and comparative advantage is that the former looks at absolute differences in productivity, while the latter looks at relative productivity differences. The difference between the theories exists because comparative advantage incorporates the concept of opportunity costs in determining which good should be produced.

Question 4

How useful are country-based theories in explaining intl trade?

Answer 4

The country-level theories are useful for explaining interindustry trade (trade in which countries exchange goods produced in different industries) among nations; however, they are not helpful in explaining intraindustry trade (trade in which countries exchange goods produced in the same industry).
The latter form of trade accounts for approximately 40 percent of world trade, yet cannot be predicted by country-level theories.

Question 5

What is the difference between interindustry and intraindustry trade?

Answer 5

The difference between interindustry trade and intraindustry trade is that the former involves two countries exchanging goods produced in different industries, while the latter involves two countries exchanging goods produced in the same industry

Question 6

how do political factors influence intl trade and investments?

Answer 6

Political factors influence international trade and investment when firms choose to invest in a foreign factory as a means of avoiding trade barriers, and when firms invest in foreign countries in order to take advantage of economic incentives offered by host government

Question 7

Why is intraindustry trade not predicted by country-based theories of change?

Answer 7

They focus on explaining interindustry trade. This is because country-level theories use the country as a unit of analysis, and examine differences in the characteristics of a country (such as land, labor, and capital) to explain trade between nations. In contrast, firm-based theories use the firm as a unit of analysis and focus on differences between firms (such as ownership
advantages) to explain trade between countries

Question 8

What is trade?

Answer 8

Voluntary exchange of goods, services, assets, or money between one person/organisation and another

Question 9

What characterises early country-based theories?

Answer 9

• focus on ind country as unit of analysis
• describes trades in commodities
• price is an imp component of a customer’s purchase decision
• explains interindustry trade

Question 10

What are the 4 theories covered in country-based theories?

Answer 10

Mercantilism, absolute advantage, comparative advantage, relative factor endowments

Question 11

What are the 2 theories covered in firm-based theories?

Answer 11

Country similarity theory, new trade theory

Question 12

What characterises modern firm-based theories?

Answer 12

• focus on firm’s role in promoting intl trade, firms as units of analysis
• useful for describing patterns of trade in differentiated goods
• believes in brand name as imp component of the purchase decision
• explains intraindustry trade

Question 13

what is mercantilism?

Answer 13

16th century economic philosophy maintaining a country’s wealth is measured by its holdings of gold and silver. The goal should be to enlarge these holdings by promoting exports + discouraging imports

Question 14

What is a synonym for protectionist?

Answer 14

Neomercantilist

Question 15

What is a criticism of mercantilism?

Answer 15

it weakens the country, squanders a country’s resources producing goods its not suited for

Question 16

What does the Absolute Advantage theory state?

Answer 16

A country should 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

Question 17

In which case will trade not occur selon the AA theory?

Answer 17

No trade will occur if a country has Abs Adv in two products

Question 18

What is the Comparative Advantage theory?

Answer 18

• u are better off specialising in what you do relatively best
• produce/export those goods and services u are relatively best able to produce
• buy other goods and services from ppl who are relatively better at producing them than u are

Question 19

What does the Relative Factor Endowment Theory state?

Answer 19

A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance. It follows the patterns of comparative advantage.

Question 20

In what sense does the relative factor endowment theory follow the patterns of comparative advantage?

Answer 20

-Export products that use relatively abundant factors of production
- import products that need relatively scarce factors of production

Question 21

why did firm-based theories develop?

Answer 21

• Growing importance of MNCs in the postwar international economy
• Inability of country-based theories to explain + predict existence/growth of intra-industry trade
• Failure to empirically validate Heckscher-Ohlin theory
• Firm-based theories incorporate factors such as quality, technology, brand names, customer loyalty to explain trade flows

Question 22

What does the Country Similarity Theory state?

Answer 22

most trade in manufactured goods should be between countries with similar per capita incomes + intraindustry trade in manufactured goods should be common. -> per capita income is the sole factor of similarity

Question 23

What does the New Trade Theory suggest?

Answer 23

Economies of scale occur if a firm’s avg cost of producing a good decreases as output of that good increases. It is an extension of Linder’s analysis by incorporating the impact of econs of scale on trade in differentiated goods.

Question 24

What are supply factors influencing FDI decisions?

Answer 24

Production cost
logistics
availability of natural resources
access to key technology

Question 25

What are demand factors influencing FDI decisions?

Answer 25

customer access
marketing advantage
exploitation of competitive advantages
customer mobility

Question 26

What are political factors influencing FDI decisions

Answer 26

Avoidance of trade barriers
development of incentives, ie free trade zones

Question 27

What is the formula for time saved in production?

Answer 27

How long it would’ve taken - how long it took for what I made = time saved

Question 28

What is the formula for opportunity cost?

Answer 28

OC = what one sacrifices / what one gains

OC = return on the best forgone option / return on the chosen option