week three - trade in goods and services, gains from trade Flashcards
what is the main reason for trade
specialisation has very important advantages
how does specialisation promote efficiency
given that there are opportunity costs, efficiency will increase as we allocate resources where they are more production
what macro effects does specialisation have
- economic growth
- income and wage convergence between countries
when do two countries gain from trade
when each country specialises in the good it produces at the lowest cost
what is ricardos trade theory
countries use their comparative advantages (differences in productivity) to specialise in the production of different products
what is the heckscher-ohlin model
Different factor endowments (land, labour and capital) explain specialisation between countries in different products (assumption: technologies are identical)
what is krugmans theory of international trade
considers imperfect competition, differences in productivity, and consumer preferences for product variety, to explain intra-industry trade, i.e. trade between countries with the same factor endowment
what is absolute advantage
It is the ability to produce a good using fewer production factors than another producer
what is comparative advantage
It is the ability to produce a good with the lowest opportunity cost
are gains from trade based on absolute or comparative advantage
comparative
what are some trade advantages
- scale economies
- more efficiency
- technology diffusion
- learning by doing
- greater variety
- lower prices
- increase in exports
what is the income distribution effect of trade
- in export and competitive industries, employment will increase
- in industries that compete with import industries, employment will fall
- as trade increases, the demand for the most abundant factor of production will also increase
what effect does specialisation have in different sectors
- value added to agriculture is lower than in industry
why is dependence on foreign suppliers considered unacceptable
harder to ensure national food security
when can trade not be determined by comparative advantage
if companies in different countries are subject to different laws and regulations
overall pros and cons of trade
pros:
- larger market
- increase in efficiency due to division of labour and competition
- increase in variety
- new technology
- macroeconomic stability
cons:
- less competitive industries disappear
- foreign dependence
- protection in early stages of industrialisation
- what each country specialises in is important as some sectors have higher value
what is the krugman theory
explanation of trade based on:
1) increasing returns: economies of scale
2) product differentiation: intra-industry trade
- a model with economies of scale, product differentiation and imperfect competition (agglomeration economics and intra-industry trade)
why is the krugman theory better than ricardos theory
the ricardo model assumes an extreme degree of specialisation that is not seen in reality
how does including the economies of scale aid krugmans explanation for trade
it justifies the geographical concentration of production
define external economies of scale
these appear when the cost of unit of product depends on the size of the industry. I.e. companies benefit from being located in a specific area (clusters)
what are cluster advantages
- the concentration of an industries production in one area reduces costs of transport, people, and ideas
- geographical advantages
- costs are reduced due to agglomeration: common suppliers, interconnections between companies that carry out different phases of production
- localisation of specialised labour
- facilitates transmission of technology
what is intraindustrial trade
the exchange of similar products belonging to the same industry
what are global value chains
the international production sharing, a phenomenon where production is broken into activities and tasks carried out in different countries
causes of globalisation from the 1980s
- ideas about advantages from higher market openness
- political changes
- communist countries became more open
- trade liberalising policies in latin american countries following the debt crises
- importance in the reduction in trade tariffs (however protection of agriculture remains high in developed countries, there are still TBTs)
- increase in trade agreements, NAFTA, Mercosur, EU
- reduction in transport costs (increase in innovations)
