ESSE TRADE
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ESSE TRADE

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

  • The country with the least resources
  • The country with the highest labor cost
  • The country with the least labor
  • The country with absolute advantage (correct)

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

  • Wealth is fixed and importing reduces it (correct)
  • Wealth increases with imports
  • Wealth is created through trade balance
  • Wealth is independent of trade

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

  • Heckscher-Ohlin (H-O) model (correct)
  • Specific factors model
  • Gravity model
  • Economies of scale

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

    <p>The size of the economies and the distance between them</p> Signup and view all the answers

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

    <p>Heckscher-Ohlin (H-O) model</p> Signup and view all the answers

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

    <p>Comparative advantage</p> Signup and view all the answers

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

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

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

    <p>Mutual benefit and efficiency in turning resources into products</p> Signup and view all the answers

    What does intra-industry trade involve?

    <p>The exchange of similar products across borders</p> Signup and view all the answers

    What does the Grubel-Lloyd index measure?

    <p>Intra-industry trade</p> Signup and view all the answers

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

    <p>Developed countries</p> Signup and view all the answers

    What macro effects does intra-industry trade have?

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

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

    <p>Reduction in average costs</p> Signup and view all the answers

    What does the Grubel-Lloyd index measure?

    <p>Intra-industry trade</p> Signup and view all the answers

    What does intra-industry trade involve?

    <p>The exchange of similar products across borders</p> Signup and view all the answers

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

    <p>Developed countries</p> 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?

    <p>The technology determining labor productivity</p> Signup and view all the answers

    What does the Stolper-Samuelson theorem dictate?

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

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

    <p>Not all factors of production benefit from trade</p> Signup and view all the answers

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

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

    What determines comparative advantage in the H-O model?

    <p>Relative factor endowments</p> Signup and view all the answers

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

    <p>The opportunity cost of producing goods</p> Signup and view all the answers

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

    <p>Consumption patterns shift towards domestically produced goods</p> Signup and view all the answers

    What is assumed in the specific factors model?

    <p>Diminishing returns to labor</p> Signup and view all the answers

    What does the history of trade models suggest about specialization?

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

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

    <p>Relative factor endowments and constant returns to scale</p> Signup and view all the answers

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

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

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

    <p>The effect on labor depends on the consumption mix</p> Signup and view all the answers

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

    <p>The country with less labor cost</p> Signup and view all the answers

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

    <p>Wealth is fixed and should be conserved within the country</p> 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?

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

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

    <p>Trade can lead to unequal distribution of factors of production</p> Signup and view all the answers

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

    <p>Factor endowments</p> Signup and view all the answers

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

    <p>Relative trade advantage</p> Signup and view all the answers

    What does the gravity model explain about international trade?

    <p>It highlights mutual benefits and efficient resource utilization</p> Signup and view all the answers

    What does the Grubel – Lloyd index measure?

    <p>Intra-industry trade importance</p> Signup and view all the answers

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

    <p>Developed countries and those with regional agreements</p> Signup and view all the answers

    What macro effects does intra-industrial trade have?

    <p>Increased sensitivity to economic cycles</p> Signup and view all the answers

    What is the primary influence on intra-industrial trade?

    <p>Economies of scale</p> Signup and view all the answers

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

    <p>Reduced average costs</p> Signup and view all the answers

    What does intra-industrial trade involve?

    <p>Exchange of similar products</p> Signup and view all the answers

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

    <p>Factor endowment differences</p> Signup and view all the answers

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

    <p>Equalization of factor prices</p> Signup and view all the answers

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

    <p>Comparative advantage</p> Signup and view all the answers

    What is the primary influence on intra-industrial trade?

    <p>Differences in factor endowments between countries</p> Signup and view all the answers

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

    <p>Not all factors may benefit equally</p> Signup and view all the answers

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

    <p>Differences in factor endowments between countries</p> Signup and view all the answers

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

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

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

    <p>The maximum amount of goods the country can produce</p> Signup and view all the answers

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

    <p>Relative factor endowments</p> Signup and view all the answers

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

    <p>Mobile capital and land</p> Signup and view all the answers

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

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

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

    <p>Labor experiences diminishing returns</p> Signup and view all the answers

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

    <p>Exporting the good in which the country has a comparative advantage</p> Signup and view all the answers

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

    <p>Not all factors may benefit equally</p> Signup and view all the answers

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

    <p>Import quotas</p> Signup and view all the answers

    What are the traditional trade policy instruments?

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

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

    <p>Ad valorem tariffs</p> 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?

    <p>WTO (World Trade Organization)</p> Signup and view all the answers

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

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

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

    <p>Compound duties</p> Signup and view all the answers

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

    <p>Voluntary export restraints (VERs)</p> Signup and view all the answers

    Which protectionist instrument does not generate revenue for the government?

    <p>Import quotas</p> Signup and view all the answers

    What are other protectionist instruments mentioned in the text?

    <p>Domestic content requirements, red tape, public procurement requirements</p> Signup and view all the answers

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

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

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

    <p>WTO (World Trade Organization)</p> Signup and view all the answers

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

    <p>Domestic producers benefit, consumers suffer, and the government gains revenue</p> 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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    Description

    Test your knowledge of David Ricardo's comparative advantage and trade models with this quiz. Explore the concepts of production possibilities frontier, autarky, gains from trade, specific factors model, H-O model, Stolper-Samuelson theorem, and more. See how well you understand the impact of technology, relative factor endowments, and constant returns to scale on comparative advantage and trade gains.

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