Week 2: International Trade Theory, Sept 19 Flashcards
tariff
taxes on goods crossing national borders
quotas
quantitative limits on imports (or exports)
trade also limited by
shipping costs, currency conversion, communication
mercantalism
-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)
what’s wrong with mercantilism
-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
absolute advantage
-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)
comparative advantage
-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
opportunity cost
-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
what determines the products for which a country will have a comparative advantage
-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”
new trade theory & why is it beneficial
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
NTT: without trade
nations might not be able to produce those products where economies of scale are important
NTT: with trade
markets are large enough to support the production necessary to achieve economies of scale
implications of NTT
-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
First Mover Advantage
being one of the first firms to produce that good may provide an advantage
why do we have int. trade
-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
effects of int. trade: if domestic price is higher
- domestic price is higher than world
- country imports and domestic price falls
- domestic consumers benefit; domestic producers are harmed
effects of int. trade: if domestic price is lower
- domestic is lower
- country begins export
- domestic producers benefit; domestic consumers are harmed
gains and losses from int. trade
-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
national competitive advantage: porters diamond
-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
factor endowments: basic factors
-natural resources, climate, location, demographics
factor endowments: advanced factors
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
factor endowments: selective factor disadvantage
-the absence of a basic factor that would be advantageous to have in abundance
demand conditions
-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
related industries
-competitiveness in related industries is mutually reinforcing; both for components and complements
Why?
–communication
–transportation
–more/larger/competitive suppliers
–workforce
strategy, structure, and rivalry
“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
the competitive advantage of nations
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