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Describe The gravity model?
It relates the trade between any two countries to the sizes of their economies. Using the gravity model also reveals the strong effects of distance and international borders—even friendly borders like that between the United States and Canada—in discouraging trade.
What dominates modern trade today?
Manufactured goods. But recently, trade in services has become increasingly important.
What has happened with Developing countries, trade?
They have shifted from being mainly exporters of primary products to being mainly exporters of manufactured goods.
What does the Ricardian model show?
How differences between countries give rise to trade and gains from trade. In this model, labor is the only factor of production, and countries differ only in the productivity of labor in different industries.
What goods will countries export and import according to the Ricardian model?
Export: Goods that their labor produces relatively efficiently
Import: Goods that their labor produces relatively inefficiently.
In other words, a country’s production pattern is determined by comparative advantage.
Describe two ways that trade benefits a country?
- Instead of producing a good for itself, a country can produce another good and trade it for the desired good. The simple model shows that whenever a good is imported, it must be true that this indirect “production” requires less labor than direct production.
- Trade enlarges a country’s consumption possibilities, which implies gains from trade.
What does The distribution of the gains from trade depend on?
The relative prices of the goods countries produce.
Describe three commonly held beliefs about trade that are wrong?
- A country gains from trade even if it has lower productivity than its trading partner in all industries.
- Trade is beneficial even if foreign industries are competitive only because of low wages.
- Trade is beneficial even if a country’s exports embody more labor than its imports.
What has been confirmed by a number of studies about the Ricardian model?
That countries will tend to export goods in which they have relatively high productivity in.
What is bad with International trade ?
It often has strong effects on the distribution of income within countries, so that it often produces losers as well as winners.
What is an useful model of income distribution effects of international trade?
The specific factors model
Why does Income distribution effects arise from trade?
- Factors of production cannot move instantaneously and costlessly from one industry to another,
- changes in an economy’s output mix have differential effects on the demand for different factors of production.
Describe the specific factors model?
It allows for a distinction between general-purpose factors that can move between sectors and factors specific to particular uses. In this model, differences in resources can cause countries to have different relative supply curves and thus cause international trade.
Why do we say that trade is good even if some loses?
Trade produces overall gains in the limited sense that those who gain could in principle compensate those who lose while still remaining better off than before.
Which factors gain and lose from trade according to the specific factors model?
Win: factors specific to export sectors in each country
Loose: factors specific to import-competing sectors lose.
Mobile factors that can work in either sector may either gain or lose.
