Week 2: International Trade Theory, Sept 19

Question 1

tariff

Answer 1

taxes on goods crossing national borders

Question 2

quotas

Answer 2

quantitative limits on imports (or exports)

Question 3

trade also limited by

Answer 3

shipping costs, currency conversion, communication

Question 4

mercantalism

Answer 4

-a countries wealth is measured by holdings of gold and silver
-nations should strive to maximize exports and minimize imports
-policy implications
- export subsidies
- import restrictions (quotas, tariffs)

Question 5

what’s wrong with mercantilism

Answer 5

-balance of trade surplus leads to inflation (David Hume)
-(Adam smith)
-zero sum game
-acquisition of treasure vs acquisition of wealth
-mercantilism actually harms a country
- import restrictions lead to inefficiencies
- benefit of voluntary exchanges

Question 6

absolute advantage

Answer 6

-a country should export those goods and services for which it is more productive than other countries are and import those for which the opposite is true; both countries will be better off (Adam smith)

Question 7

comparative advantage

Answer 7

-aka, lower opportunity cost
-when each country specializes in producing the good or service for which it has a comparative advantage, total production in the economy rises without additional resources
- each benefits by obtaining a good/service at a price that is lower than their opportunity costs of that item
-the gains from specialization and trade are based on comparative advantage

Question 8

opportunity cost

Answer 8

-whatever must be given up to obtain an item
-there is a mutual benefit to exchange when individuals (or businesses or countries) have different opportunity costs

Question 9

what determines the products for which a country will have a comparative advantage

Answer 9

-Ricardo says productivity
-heckscher-ohlin says
1. factor endowments vary among countries
2. goods differ according to the types of factors that are used to produce them
“a country will have CA… when it uses resources it has in relative abundance”

Question 10

new trade theory & why is it beneficial

Answer 10

increases product variety and reduces costs

it is mutually beneficial bc it allows for the specialization of production, realization of scale economies, and the production of a greater variety of products at lower prices

Question 11

NTT: without trade

Answer 11

nations might not be able to produce those products where economies of scale are important

Question 12

NTT: with trade

Answer 12

markets are large enough to support the production necessary to achieve economies of scale

Question 13

implications of NTT

Answer 13

-nations may benefit even when they do not differ in resource endowments or tech
-a country may dominate exportation of a good bc of First Mover Advantage
-does not contradict comparative advantage theory but instead identifies a sources of comparative advantage

Question 14

First Mover Advantage

Answer 14

being one of the first firms to produce that good may provide an advantage

Question 15

why do we have int. trade

Answer 15

-businesses and individuals will be better off
-products/services unavailable, expensive, or inferior locally
-businesses can globalize their markets to facilitate the globalization of production

Question 16

effects of int. trade: if domestic price is higher

Answer 16

1. domestic price is higher than world
2. country imports and domestic price falls
3. domestic consumers benefit; domestic producers are harmed

Question 17

effects of int. trade: if domestic price is lower

Answer 17

1. domestic is lower
2. country begins export
3. domestic producers benefit; domestic consumers are harmed

Question 18

gains and losses from int. trade

Answer 18

-the total/aggregate gains from specialization and trade are greater than the losses, but the gains and losses are unevenly distributed
- this creates lobby initiative and complex policy choices
- the challenge becomes the willingness of winners to compensate losers via redistribution policies most often
- also issues of security, sovereignty, nationalism, enviro protection, inequality

Question 19

national competitive advantage: porters diamond

Answer 19

-four attributed of a nation shape the enviro in which local firms compete and thus determine the int. success in an industry
1. factor endowments
2. demand conditions
3. related and supporting industries
4. firm strategy, structure, and rivalry

Question 20

factor endowments: basic factors

Answer 20

-natural resources, climate, location, demographics

Question 21

factor endowments: advanced factors

Answer 21

advances factors
-specialized factors which are created and therefore both harder to imitate and more valuable
-advanced factors are a product of investment by individuals, companies, and governments

Question 22

factor endowments: selective factor disadvantage

Answer 22

-the absence of a basic factor that would be advantageous to have in abundance

Question 23

demand conditions

Answer 23

-large sophisticated domestic consumer base compels innovation and quality improvements
-picky buyers are valuable when they demand produce attributes that are (will be) appealing also to foreign consumers

Question 24

related industries

Answer 24

-competitiveness in related industries is mutually reinforcing; both for components and complements
Why?
–communication
–transportation
–more/larger/competitive suppliers
–workforce

Question 25

strategy, structure, and rivalry

Answer 25

“the more localized the rivalry, the more intense”

being close to your rivals keeps you at the cutting edge of technology
-domestic rivals more valuable
–a monopolist becomes complacent (ie, smug)
-rivalry may stimulate specific factor supply

Question 26

the competitive advantage of nations

Answer 26

1.embrace adversity - seek out competition and demanding consumers
2.quality not quantity - abundance of general use factors, large firms not important, but high quality factors, suppliers, buyers and rivals are
3.agglomerate - rather than seeking cheap labour or land, locate in the middle of an industry cluster