Classical Trade Theories Flashcards

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Questions and Answers

What is Mercantilism?

A system of free trade

A system of government institutions and policies designed to restrict international trade (correct)

A theory of comparative advantage

A form of international cooperation

What does Additional Assumption 8 state?

Resources cannot move between countries

What is stated in Additional Assumption 9?

There are no trade barriers

What does Additional Assumption 10 entail?

Exports must pay for imports; trade must be balanced Signup and view all the answers

What is described by Additional Assumption 11?

Labor is the only relevant resource Signup and view all the answers

What does the Labor Theory of Value state?

The pre-trade price of a good is determined by the amount of labor it took to produce it Signup and view all the answers

What does Additional Assumption 12 suggest?

Constant returns to scale between labor and output prevails Signup and view all the answers

What is Absolute Advantage?

The ability of a country to produce a good using fewer productive inputs than is possible anywhere else in the world Signup and view all the answers

What principle did Adam Smith advocate regarding production?

Countries should specialize in the production of goods in which they have an absolute advantage Signup and view all the answers

What causes a country to follow its absolute advantage?

Market forces combined with free trade Signup and view all the answers

Labor cost (Ps) = _____

wage rate (Wa) x the amount of labor input (HOURSsa) Signup and view all the answers

What is David Ricardo's Law of Comparative Advantage?

Countries should specialize where they have their greatest absolute advantage or in their least absolute disadvantage Signup and view all the answers

What does the slope of the PPF represent?

Pre-trade relative price Signup and view all the answers

What are Terms of Trade?

The relative price at which trade occurs between countries Signup and view all the answers

What does Production Gain refer to?

International trade causes A's production to be focused on industries where A's labor is relatively more efficient Signup and view all the answers

What is Consumer Gain?

A's consumers are able to buy goods more cheaply Signup and view all the answers

What must occur for trade to happen between countries with different labor productivities?

Wages must be higher in one country than in the other Signup and view all the answers

When can a country lose its comparative advantage?

If wages get out of line with productivity Signup and view all the answers

What is a limitation of the classical trade model?

The model does not explain why differences in productivity levels between countries exist Signup and view all the answers

What extreme prediction does the model make?

Countries will completely specialize in the production of exportables only Signup and view all the answers

What does the model suggest about gains from trade?

They are greater between countries of dissimilar production technologies Signup and view all the answers

What motive for trade does the model provide?

A motive for trade between developed and developing countries Signup and view all the answers

How can high-wage countries still benefit from trade?

Even when faced with low-wage competing countries Signup and view all the answers

Study Notes

Mercantilism

A government system aimed at restricting international trade to strengthen national power.

Additional Assumptions

Resources are immobile across countries, hindering labor and capital transfer.
Absence of trade barriers promotes free exchange between nations.
There's a necessity for exports to balance imports, ensuring trade equilibrium.
Labor is identified as the sole significant resource in trade models.

Labor Theory of Value

The price of goods before trade is directly tied to the labor input required for their production.

Constant Returns to Scale

A fixed ratio exists between labor input and output level, maintaining consistent productivity proportions.

Absolute Advantage

Describes the capacity of a country to produce goods with fewer inputs than any competitor globally.

Adam Smith's Principle

Suggests countries should focus on goods where they possess an absolute advantage, enhancing efficiency.

Market Forces and Free Trade

Combined economic factors drive countries to adhere to their absolute advantages, optimizing productivity.

Labor Cost Calculation

Labor cost is computed using wage rates multiplied by the number of hours worked.

David Ricardo's Law of Comparative Advantage

Highlights specialization in areas of greatest efficiency or least disadvantage to maximize trade benefits.

Slope of the PPF

Represents the pre-trade relative prices and trade-offs between different goods.

Terms of Trade

Defines the relative price points at which international trade occurs.

Production and Consumer Gains

Trade focuses production on sectors where labor is more efficient.
Consumers enjoy lower prices for goods as a result of competitive international markets.

Wage Disparities and Productivity

Trade between countries with varying productivity levels is contingent on differing wage structures.

Loss of Comparative Advantage

A country can forfeit its comparative benefits if wage growth exceeds productivity improvements.

Limitations of the Model

Fails to account for the origins of productivity differences between nations.
Predicts extreme scenarios of total specialization in exports, which is often unrealistic.

Trade Between Similar Economies

Suggests greater trade gains exist between countries with differing production technologies, despite most trades occurring among similarly developed nations.

Motives for Trade

Provides rationale for trade relationships between developed and developing countries, emphasizing mutual benefits.

High-Wage Countries and Trade

High-wage countries can still gain from trade despite competition from lower-wage nations.

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Description

Explore key concepts and terms related to the Classical Theory of International Trade with these flashcards. Definitions cover important theories such as mercantilism and various trade assumptions. Perfect for students looking to deepen their understanding of international economics.