week three - trade in goods and services, gains from trade Flashcards

1
Q

what is the main reason for trade

A

specialisation has very important advantages

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2
Q

how does specialisation promote efficiency

A

given that there are opportunity costs, efficiency will increase as we allocate resources where they are more production

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3
Q

what macro effects does specialisation have

A
  • economic growth
  • income and wage convergence between countries
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4
Q

when do two countries gain from trade

A

when each country specialises in the good it produces at the lowest cost

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5
Q

what is ricardos trade theory

A

countries use their comparative advantages (differences in productivity) to specialise in the production of different products

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6
Q

what is the heckscher-ohlin model

A

Different factor endowments (land, labour and capital) explain specialisation between countries in different products (assumption: technologies are identical)

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7
Q

what is krugmans theory of international trade

A

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

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8
Q

what is absolute advantage

A

It is the ability to produce a good using fewer production factors than another producer

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9
Q

what is comparative advantage

A

It is the ability to produce a good with the lowest opportunity cost

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10
Q

are gains from trade based on absolute or comparative advantage

A

comparative

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11
Q

what are some trade advantages

A
  • scale economies
  • more efficiency
  • technology diffusion
  • learning by doing
  • greater variety
  • lower prices
  • increase in exports
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12
Q

what is the income distribution effect of trade

A
  • 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
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13
Q

what effect does specialisation have in different sectors

A
  • value added to agriculture is lower than in industry
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14
Q

why is dependence on foreign suppliers considered unacceptable

A

harder to ensure national food security

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15
Q

when can trade not be determined by comparative advantage

A

if companies in different countries are subject to different laws and regulations

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16
Q

overall pros and cons of trade

A

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

17
Q

what is the krugman theory

A

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)
18
Q

why is the krugman theory better than ricardos theory

A

the ricardo model assumes an extreme degree of specialisation that is not seen in reality

19
Q

how does including the economies of scale aid krugmans explanation for trade

A

it justifies the geographical concentration of production

20
Q

define external economies of scale

A

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)

21
Q

what are cluster advantages

A
  • 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
22
Q

what is intraindustrial trade

A

the exchange of similar products belonging to the same industry

23
Q

what are global value chains

A

the international production sharing, a phenomenon where production is broken into activities and tasks carried out in different countries

24
Q

causes of globalisation from the 1980s

A
  • 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)
25
Q

what are some key characteristics of international trade

A

3/4 of traded products are manufactured goods due to:
- positive income elasticity
- agriculture protection
- vertical specialisation and outsourcing have promoted the increase in trade

26
Q

define outsourcing

A

when a part of the production process is shifted to another country

27
Q

what is vertical specialisation

A

companies purchasing of the intermediate goods and components on the market rather than produce them internally

28
Q

what trade model explains trade due to differences in productivity

A

ricardian model

29
Q

what trade model explains trade due to the production of different varieties of products

A

krugman model

30
Q

reasons for slowbalisation

A
  • trade wars
  • Brexit
  • protectionism
  • COVID
  • financial crises
  • the slowdown in the reduction of transport costs
  • trade slowdown
  • countries are increasingly becoming service economies
31
Q

what has the protection evolution been between sectors and countries

A
  • sectors: agricultural goods are more protected than manufactures
  • countries: highest protection in Asia and Africa than in developed countries
32
Q

what trade model explains trade because of different factor endowments

A

heckscher-ohlin model

33
Q

why were technological advances more key in the first globalisation

A

because in the 2nd globalisation, cost reductions due to technology were offset by the increase in input prices and anti-competitive practices

34
Q

was there a greater importance of tariff reductions in the first or second globalisation

A

second, with the best progress being in manufacturing

35
Q

in the past globalisation what products had the greatest convergence

A

agricultural products

36
Q

in the current globalisation what products had the greatest convergence

A

manufactured goods