ESSE TRADE

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Questions and Answers

According to Adam Smith's absolute advantage theory, which country can produce the good more cheaply?

The country with absolute advantage

In the context of mercantilism, what was the belief about wealth?

Wealth is fixed and importing reduces it

Which model focuses on the differences in factor endowments between countries?

Heckscher-Ohlin (H-O) model

According to the gravity model, what does the strength of trade between two countries depend on?

The size of the economies and the distance between them Signup and view all the answers

Which trade model emphasizes the relative abundance of factors of production as the driver of trade?

Heckscher-Ohlin (H-O) model Signup and view all the answers

What concept is a key idea in both the Ricardo and Heckscher-Ohlin models?

Comparative advantage Signup and view all the answers

What does the revealed comparative advantage (RCA) index measure?

A country's relative advantage or disadvantage in specific industries based on trade flows Signup and view all the answers

What does the Gravity model emphasize in explaining why nations trade?

Mutual benefit and efficiency in turning resources into products Signup and view all the answers

What does intra-industry trade involve?

The exchange of similar products across borders Signup and view all the answers

What does the Grubel-Lloyd index measure?

Intra-industry trade Signup and view all the answers

In which type of economies does intra-industry trade tend to be higher?

Developed countries Signup and view all the answers

What macro effects does intra-industry trade have?

Greater relationship between exports and imports, increased sensitivity to economic cycles, and rapid transmission of economic shocks Signup and view all the answers

What do economies of scale in large-scale production lead to?

Reduction in average costs Signup and view all the answers

What does the Grubel-Lloyd index measure?

Intra-industry trade Signup and view all the answers

What does intra-industry trade involve?

The exchange of similar products across borders Signup and view all the answers

In which type of economies does intra-industry trade tend to be higher?

Developed countries Signup and view all the answers

In the 2x2x1 model for comparative advantage, what determines the production possibilities frontier (PPF) slope for the home country?

The technology determining labor productivity Signup and view all the answers

What does the Stolper-Samuelson theorem dictate?

Changes in relative prices affect the returns to specific factors of production Signup and view all the answers

In the specific factors model, what happens when trade is opened up?

Not all factors of production benefit from trade Signup and view all the answers

What does the H-O model highlight about factors of production?

Factors of production cannot move across countries but can move between industries Signup and view all the answers

What determines comparative advantage in the H-O model?

Relative factor endowments Signup and view all the answers

What does the production possibilities frontier (PPF) for the home country show in autarky?

The opportunity cost of producing goods Signup and view all the answers

What is the impact of trade on consumption patterns in the 2x2x1 model?

Consumption patterns shift towards domestically produced goods Signup and view all the answers

What is assumed in the specific factors model?

Diminishing returns to labor Signup and view all the answers

What does the history of trade models suggest about specialization?

Each country should specialize in producing and exporting the good in which it has a comparative advantage Signup and view all the answers

What is the basis for the gains from trade in the H-O model?

Relative factor endowments and constant returns to scale Signup and view all the answers

What is the impact of trade on factors of production in the H-O model?

Not everyone is better off, and the impact on factors of production can vary Signup and view all the answers

What does the Stolper-Samuelson theorem state about the effect on labor?

The effect on labor depends on the consumption mix Signup and view all the answers

According to Adam Smith's absolute advantage theory, which country can produce the good more cheaply?

The country with less labor cost Signup and view all the answers

In the context of mercantilism, what was the belief about wealth?

Wealth is fixed and should be conserved within the country Signup and view all the answers

What was the problem raised in Adam Smith's absolute advantage theory if a country has absolute advantage in everything?

It raises the question of trade between countries with absolute advantage Signup and view all the answers

What did the specific factors model emphasize about the impact of trade on factors of production?

Trade can lead to unequal distribution of factors of production Signup and view all the answers

What is the primary determinant of comparative advantage in the Heckser-Ohlin (H-O) model?

Factor endowments Signup and view all the answers

What does the revealed comparative advantage (RCA) index measure?

Relative trade advantage Signup and view all the answers

What does the gravity model explain about international trade?

It highlights mutual benefits and efficient resource utilization Signup and view all the answers

What does the Grubel – Lloyd index measure?

Intra-industry trade importance Signup and view all the answers

In which type of economies is the weight of intra-industrial trade higher?

Developed countries and those with regional agreements Signup and view all the answers

What macro effects does intra-industrial trade have?

Increased sensitivity to economic cycles Signup and view all the answers

What is the primary influence on intra-industrial trade?

Economies of scale Signup and view all the answers

What do economies of scale lead to in large-scale production?

Reduced average costs Signup and view all the answers

What does intra-industrial trade involve?

Exchange of similar products Signup and view all the answers

What is the basis for the gains from trade in the H-O model?

Factor endowment differences Signup and view all the answers

What is the impact of trade on factors of production in the H-O model?

Equalization of factor prices Signup and view all the answers

What concept is a key idea in both the Ricardo and Heckscher-Ohlin models?

Comparative advantage Signup and view all the answers

What is the primary influence on intra-industrial trade?

Differences in factor endowments between countries Signup and view all the answers

What does the specific factors model emphasize about the impact of trade on factors of production?

Not all factors may benefit equally Signup and view all the answers

What is the basis for the gains from trade in the Heckser-Ohlin (H-O) model?

Differences in factor endowments between countries Signup and view all the answers

What does the Heckser-Ohlin model assume about factors of production?

Factors of production cannot move across countries but can move between industries Signup and view all the answers

What does the production possibilities frontier of the home country indicate in autarky?

The maximum amount of goods the country can produce Signup and view all the answers

What concept is a key idea in both the Ricardo and Heckscher-Ohlin models?

Relative factor endowments Signup and view all the answers

What does the specific factors model introduce in addition to labor?

Mobile capital and land Signup and view all the answers

What does the Heckser-Ohlin model assume about the mobility of factors of production?

Factors of production cannot move across countries but can move between industries Signup and view all the answers

What is assumed in the specific factors model about labor across industries?

Labor experiences diminishing returns Signup and view all the answers

What does opening up to trade lead to in the 2x2x1 model for comparative advantage?

Exporting the good in which the country has a comparative advantage Signup and view all the answers

What does the Heckser-Ohlin model emphasize about the effects of trade on factors of production?

Not all factors may benefit equally Signup and view all the answers

Which trade policy instrument restricts the quantity of imported goods and does not generate revenue for the government?

Import quotas Signup and view all the answers

What are the traditional trade policy instruments?

Import quotas, voluntary export restraints (VERs), ad valorem tariffs Signup and view all the answers

What type of tariffs result in domestic producers benefiting, consumers suffering, and the government gaining revenue?

Ad valorem tariffs Signup and view all the answers

What organization builds on the rules developed since 1948 in the GATT and serves as a negotiating forum, a body of rules, and a dispute resolution system for international trade?

WTO (World Trade Organization) Signup and view all the answers

What are the principles of the multilateral system according to the text?

Non-discriminatory treatment, promotion of free trade, and encouragement of fair competition and development Signup and view all the answers

What type of duties combine both specific (fixed charge per unit) and ad valorem (fraction of value) tariffs?

Compound duties Signup and view all the answers

What are limits imposed by exporting countries, usually at the request of importing countries?

Voluntary export restraints (VERs) Signup and view all the answers

Which protectionist instrument does not generate revenue for the government?

Import quotas Signup and view all the answers

What are other protectionist instruments mentioned in the text?

Domestic content requirements, red tape, public procurement requirements Signup and view all the answers

What is the primary role of the World Trade Organization (WTO) according to the text?

Negotiating forum, body of rules, and dispute resolution system for international trade Signup and view all the answers

What organization was established in 1995 and builds on the rules developed since 1948 in the GATT?

WTO (World Trade Organization) Signup and view all the answers

What is the impact of tariffs on domestic producers, consumers, and the government according to the text?

Domestic producers benefit, consumers suffer, and the government gains revenue Signup and view all the answers

Study Notes

David Ricardo's Comparative Advantage and Trade Models

David Ricardo's comparative advantage theory is based on a 2x2x1 model with 2 countries and 2 goods, assuming fixed opportunity cost, no transportation costs, and technology determining labor productivity.
The production possibilities frontier for the home country shows that it can produce 2 units of cloth and 4 units of wheat per worker.
In autarky, the home country's consumption of goods and wage levels are determined by perfect competition, with the relative price of wheat being the slope of the PPF.
Opening up to trade leads to each country exporting the good in which it has a comparative advantage, changing relative prices and consumption patterns.
The specific factors model, a 2x2x3 model, assumes 2 countries, 2 goods, and 3 factors of production, with diminishing returns to labor and technology determining labor productivity.
Opening up to trade in the specific factors model results in overall gains from trade, but not all factors of production benefit, and the effect on labor is unclear.
The H-O model is based on a 2x2x2 model with 2 factors of production and 2 goods, assuming constant returns to scale and relative factor endowments determining comparative advantage.
Both the specific factors model and the H-O model show that the gains from trade are positive, but not everyone is better off, and the impact on factors of production can vary.
The H-O model highlights that relative factor endowments determine comparative advantage, and factors of production cannot move across countries but can move between industries.
The history of trade models suggests that each country should specialize in producing and exporting the good in which it has a comparative advantage, leading to overall gains from trade.
The Stolper-Samuelson theorem dictates that changes in relative prices affect the returns to specific factors of production, and the effect on labor depends on consumption mix.
In the H-O model, technology, relative factor endowments, and constant returns to scale play a key role in determining comparative advantage and the gains from trade.

International Trade: Models, Comparative Advantage, and Intra-Industry Trade

The Heckser-Ohlin (H-O) model explains that countries specialize in goods based on the abundance of factors of production.
Opening up to trade under the H-O model leads to a "trade triangle," benefiting both countries.
Comparative advantage in the H-O model is determined by lower opportunity cost, not just lower absolute cost.
The revealed comparative advantage (RCA) index measures a country's relative advantage in specific industries based on trade flows.
Economies of scale lead to large-scale production, reducing average costs and increasing trade efficiency.
The gravity model explains that nations trade because it is mutually beneficial and allows for efficient resource utilization.
Intra-industry trade involves the exchange of similar products across borders, challenging traditional trade theories.
The Grubel – Lloyd index measures intra-industry trade, with higher values indicating greater trade importance.
The weight of intra-industrial trade is higher in developed countries and those with regional agreements.
Intra-industrial trade has macro effects, including a greater relationship between exports and imports, and increased sensitivity to economic cycles.
Intra-industrial trade also causes economic shocks to be transmitted more quickly across countries.
Intra-industrial trade is important in sophisticated sectors like chemicals, electronics, and transportation equipment, and is influenced by FDI and multinational companies.

Protectionism and Trade Policy Instruments

Protectionism exists due to the redistributive effects of free trade, creating opposition and the need for protectionist measures.
Openness to trade generates positive net benefits, including efficiency gains, competition, and access to capital and technology.
The adjustment process must be facilitated in areas with negative cost/benefit ratios through a flexible economy and appropriate safety nets.
Traditional trade policy instruments include tariffs, quotas, and voluntary export restraints (VERs).
Tariffs can be specific (fixed charge per unit) or ad valorem (fraction of value), with compound duties combining both.
The welfare effects of tariffs result in domestic producers benefitting, consumers suffering, and the government gaining revenue.
Import quotas restrict the quantity of imported goods and do not generate revenue for the government.
Voluntary export restraints (VERs) are limits imposed by exporting countries, usually at the request of importing countries.
Other protectionist instruments include domestic content requirements, red tape, and public procurement requirements.
The World Trade Organization (WTO) was established in 1995 and builds on the rules developed since 1948 in the GATT.
The WTO serves as a negotiating forum, a body of rules, and a dispute resolution system for international trade.
The principles of the multilateral system include non-discriminatory treatment, promotion of free trade, and encouragement of fair competition and development.

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ESSE TRADE

Questions and Answers

According to Adam Smith's absolute advantage theory, which country can produce the good more cheaply?

In the context of mercantilism, what was the belief about wealth?

Which model focuses on the differences in factor endowments between countries?

According to the gravity model, what does the strength of trade between two countries depend on?

Which trade model emphasizes the relative abundance of factors of production as the driver of trade?

What concept is a key idea in both the Ricardo and Heckscher-Ohlin models?

What does the revealed comparative advantage (RCA) index measure?

What does the Gravity model emphasize in explaining why nations trade?

What does intra-industry trade involve?

What does the Grubel-Lloyd index measure?

In which type of economies does intra-industry trade tend to be higher?

What macro effects does intra-industry trade have?

What do economies of scale in large-scale production lead to?

What does the Grubel-Lloyd index measure?

What does intra-industry trade involve?

In which type of economies does intra-industry trade tend to be higher?

In the 2x2x1 model for comparative advantage, what determines the production possibilities frontier (PPF) slope for the home country?

What does the Stolper-Samuelson theorem dictate?

In the specific factors model, what happens when trade is opened up?

What does the H-O model highlight about factors of production?

What determines comparative advantage in the H-O model?

What does the production possibilities frontier (PPF) for the home country show in autarky?

What is the impact of trade on consumption patterns in the 2x2x1 model?

What is assumed in the specific factors model?

What does the history of trade models suggest about specialization?

What is the basis for the gains from trade in the H-O model?

What is the impact of trade on factors of production in the H-O model?

What does the Stolper-Samuelson theorem state about the effect on labor?

According to Adam Smith's absolute advantage theory, which country can produce the good more cheaply?

In the context of mercantilism, what was the belief about wealth?

What was the problem raised in Adam Smith's absolute advantage theory if a country has absolute advantage in everything?

What did the specific factors model emphasize about the impact of trade on factors of production?

What is the primary determinant of comparative advantage in the Heckser-Ohlin (H-O) model?

What does the revealed comparative advantage (RCA) index measure?

What does the gravity model explain about international trade?

What does the Grubel – Lloyd index measure?

In which type of economies is the weight of intra-industrial trade higher?

What macro effects does intra-industrial trade have?

What is the primary influence on intra-industrial trade?

What do economies of scale lead to in large-scale production?

What does intra-industrial trade involve?

What is the basis for the gains from trade in the H-O model?

What is the impact of trade on factors of production in the H-O model?

What concept is a key idea in both the Ricardo and Heckscher-Ohlin models?

What is the primary influence on intra-industrial trade?

What does the specific factors model emphasize about the impact of trade on factors of production?

What is the basis for the gains from trade in the Heckser-Ohlin (H-O) model?

What does the Heckser-Ohlin model assume about factors of production?

What does the production possibilities frontier of the home country indicate in autarky?

What concept is a key idea in both the Ricardo and Heckscher-Ohlin models?

What does the specific factors model introduce in addition to labor?

What does the Heckser-Ohlin model assume about the mobility of factors of production?

What is assumed in the specific factors model about labor across industries?

What does opening up to trade lead to in the 2x2x1 model for comparative advantage?

What does the Heckser-Ohlin model emphasize about the effects of trade on factors of production?

Which trade policy instrument restricts the quantity of imported goods and does not generate revenue for the government?

What are the traditional trade policy instruments?

What type of tariffs result in domestic producers benefiting, consumers suffering, and the government gaining revenue?

What organization builds on the rules developed since 1948 in the GATT and serves as a negotiating forum, a body of rules, and a dispute resolution system for international trade?

What are the principles of the multilateral system according to the text?

What type of duties combine both specific (fixed charge per unit) and ad valorem (fraction of value) tariffs?

What are limits imposed by exporting countries, usually at the request of importing countries?

Which protectionist instrument does not generate revenue for the government?

What are other protectionist instruments mentioned in the text?

What is the primary role of the World Trade Organization (WTO) according to the text?

What organization was established in 1995 and builds on the rules developed since 1948 in the GATT?

What is the impact of tariffs on domestic producers, consumers, and the government according to the text?

Study Notes

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