IBE

33 flashcards · Other · by Daniel F.

1. Trade triangle under free trade

2. Absolute advantages

   Being able to produce something at lower costs than other producers

3. Gain from trade

   Both countries move to higher indifference curves and gain welfare size of the welfare gain - Terms of trade (= price of exports/price of imports)

4. Heckscher-Ohlin theory

   Differences in factor endowments across countries and factor intensities across industries determine relative prices in the two countries Countries have a comparative advantage in the production of the product that uses their abundant production factor intensively -> Countries will export the product in which they have a comparative advantage

5. H-O welfare effect in short/long run

6. Welfare effects in the long-run

   In the long-run, production factors are mobile across sectors within a country. Factors move to the export-oriented sector because factor earnings are higher. Continues until factors are paid the same in all sectors

7. Stolper-Samuelson Theorem

   An increase in the relative price of a good increases the real return to the factor used intensively in the production of this good Returns to the factor used intensively in the export-oriented sector (= abundant factor) increase, returns to the factor used intensively in the import-competing sector (= scarce factor) fall

8. Factor-price equalization

   free trade leads to equal product prices (wheat, cloth) equal factor prices (wages, land rents) In real world: International factor prices are not the same, but evidence for convergence.

9. Sources of growth

   Increase in country’s endowment with production factors Improvement in production technology

10. Types of growth

    balanced growth imbalanced growth

11. Balanced growth

    PPC shifts out in same proportions in direction of the two goods. Proportionately, relative production patterns do not change

12. biased growth

    PPC shift biased in favor of one good Production patterns change in favor of this good

13. Welfare effect of growth in a large country

14. immiserizing growth

    growth in production factors leads to a decline in overall welfare growth is strongly biased toward expanding the supply of exports and the terms of trade deteriorate strongly because the foreign demand for the country’s products is very price inelastic

15. Heckscher-Ohlin prediction: R&D undertaken in industrialized countries

    new technologies can be used anywhere (global diffusion) and the production location of these technologies can shift over time

16. Vernon’s product life-cycle hypothesis

    R&D happens in industrialized countries Through standardization production location shifts to poorer countries abundant in low-skilled labor The original inventor (and exporter) of the good becomes an importer of it

17. Trade results in

    economic growth income inequality Stolper-Samuelson theorem: reduce real wages of low-skilled workers Technological progress is skill-biased

18. import tariff in a small economy

    Increase in the domestic price of the product. Fall in consumer surplus, rise in producer surplus. Fall in quantity imported Tariff generates government revenue

19. import tariff in a large economy

    monopsony power power to stop importing If a large country imposes an import tariff, the world price of the product falls If the tariff is not too high, the importing country as a whole may gain from the tariff. The higher the tariff, the more the world price will fall. This benefits the importing country. But, the higher the tariff, the more imports will decline. This reduces the tax base and harms the country. From a global perspective, a tariff is always welfare reducing.

20. Import quotas vs. tariffs

    net wellfare loss is the same except for resource using allocation of import licenses With a quota system, the government has control over who will obtain the import incenses world price does not influence quantity of import

21. import quota in a large economy

22. Comparative advantage

    Being able to produce a certain product at relatively lower costs (compared to other products) than other producers

23. Ricardo’s principle of comparative advantage

    beneficial trade can occur even if one country is worse (less productive) at producing all products a country will export products that it can produce at low opportunity cost in return for imports of products that it would otherwise produce at high opportunity cost constant marginal costs, so a country’s ppc is a straight line Low productivity countries have low real wages

24. PPC and IC

    Production/Supply S Consumption C

25. Rybczynski theorem

    In a two-good world, and assuming that product prices are constant, growth in the country’s endowment of one factor of production, with the other factor unchanged, has two results: An increase in the output of the good that uses the growing factor intensively. A decrease in the output of the other good.

26. Welfare effect of growth in a small country

    international relative price will not be affected by the country's change in exports and imports. The terms of trade are unaffected. welfare unambiguously increases.

27. Nationally optimal tariff

    A suitably small tariff can increase the country’s net national welfare. If the tariff is too high, the net effect on national welfare is negative (just like in a small country). Extreme case: Prohibitive tax that eliminates imports (zero tariff revenue).

28. import quota in a small economy

    c is gained by whomever the import licenses are allocated to Fixed favoritism Auction Resource-using procedure

29. Fixed favoritism

    The government allocates the import licenses to firms free of charge Net welfare loss for the country: b + d.

30. Competitive auction

    The government sells the import licenses on a competitive basis to the highest bidder Firms compete for the licenses and are willing to sacrifice this profit to get the license: The area c becomes government revenue and thus part of the country's net national wellbeing. Net welfare loss for the country: b + d.

31. Resource-using procedure

    Import licenses are allocated to firms based on a competitive application procedure Encourages firms to spend resources to prove their worthiness, lobby the government, etc. (rent-seeking activities) firms spend up to c on rest seeking, it is wasted

32. Other NTBs

    Voluntary export restraints (VER) - Works like a quota, large losses in importing country Product standards - Requirement that imported products satisfy certain standards in terms of product quality, production method etc Domestic content requirement - Requirement that domestically sold products have a minimum amount of domestic production value Government procurement - Requirement that the government must purchase from domestic producers

33. Increase of wellfare under free trade

    Trade makes everyone better off The larger the price change from trade (= difference between world price and autarky price), the bigger the welfare gain: The country experiencing the larger price change gains more from trade. In a country with a steep (less elastic) import demand or export supply curve the price change is bigger and the welfare gain from trade is larger.