International Economics Overview

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Questions and Answers

What is the primary explanation for the phenomenon known as the Leontief Paradox?

The U.S. imports capital-intensive goods due to high production costs.

The U.S. exports capital-intensive goods despite it being labor-abundant. (correct)

The U.S. has a comparative advantage in agricultural products.

The U.S. experiences equal trade balances with all countries.

Which theory posits that trade can occur due to technological differences between nations?

Factor Proportions Theory

Absolute Advantage

The Technological Gap Model (correct)

The Product Cycle Model

What does the Production Possibility Frontier illustrate in the context of international trade?

The factors influencing market equilibrium.

The trade-offs between producing different goods under constant costs. (correct)

The comparative advantage of countries in relation to resources.

The impact of tariffs on trade volume.

What is a key criticism of the factor proportions theory in international trade?

It fails to consider economies of scale. Signup and view all the answers

Which of the following is considered a nontariff barrier to trade?

Import quotas Signup and view all the answers

In the context of comparative advantage, what is the opportunity cost?

The value of the best alternative foregone when making a choice. Signup and view all the answers

What do tariffs aim to achieve in the context of international trade?

Inflate prices of imported goods. Signup and view all the answers

Which model explains trade patterns based on a country’s technological advancements over time?

Product Cycle Model Signup and view all the answers

What is a potential negative consequence of labor migration in advanced nations?

Job losses for less-skilled labor Signup and view all the answers

How does financial globalization benefit individuals and corporations?

By providing opportunities for higher returns Signup and view all the answers

What major societal issue has globalization been associated with in poorer countries?

Child labor Signup and view all the answers

What does GDP measure in relation to international trade?

Total value of goods and services produced Signup and view all the answers

Which of the following commodities is NOT produced in the United States?

Coffee Signup and view all the answers

What happens to job costs when products are produced domestically but at a higher cost than abroad?

The standard of living may decline Signup and view all the answers

Which of these resources is indicated as having dwindling reserves in the United States?

Petroleum Signup and view all the answers

What is one important aspect of globalization that economists must consider?

It has social, political, and ethical dimensions Signup and view all the answers

What is the fundamental proposition of trade?

Voluntary trade is mutually beneficial. Signup and view all the answers

What major global events marked the end of the first period of globalization?

The breakout of World War 1. Signup and view all the answers

Which of the following characterized the second period of rapid globalization post-World War II?

Dismantling of trade protection. Signup and view all the answers

One significant difference between domestic and international trade is that:

Different national currencies are involved. Signup and view all the answers

What role did foreign investments play in the globalization during 1870-1914?

They were essential for developing agriculture and resource extraction. Signup and view all the answers

Which countries were primarily involved in the major foreign investments during the first period of globalization?

England and resource-rich countries. Signup and view all the answers

How did the Great Depression affect international trade policies?

It prompted heavy trade protectionism. Signup and view all the answers

The module in international finance primarily examines which aspects of international economics?

Exchange of financial assets and liabilities. Signup and view all the answers

What does an index of openness exceeding 20 percent indicate about South Africa's economy?

A relatively open economy Signup and view all the answers

What was a major impact of trade sanctions on South Africa during the 1980s?

Limited effects on export volume Signup and view all the answers

Why did South Africa's index of openness increase to about 27 percent in 2001?

Increase in foreign capital investments Signup and view all the answers

According to the gravity model, what factors increase the volume of bilateral trade between two countries?

Larger GDPs and closer proximity Signup and view all the answers

What was a significant consequence of the financial sanctions imposed on South Africa between 1985 and 1994?

Capital flight and slow economic growth Signup and view all the answers

What is a possible effect of trade negotiations that reduce trade barriers?

Increased imports and job reductions in some sectors Signup and view all the answers

How did the index of openness change for South Africa between 1985 and 1994?

It experienced a decline followed by rapid growth Signup and view all the answers

What is illustrated by the fact that economic events in one nation significantly affect others?

Growing economic interdependence Signup and view all the answers

Which country has an absolute advantage in the production of good A?

Country Y Signup and view all the answers

What is the autarky price ratio of Country X for goods A and B?

2A:1B Signup and view all the answers

In terms of production efficiency, how does Country X's output of good B compare to Country Y's output of good B?

Country X is more efficient than Country Y. Signup and view all the answers

What does the term 'constant returns to scale' imply in the production model?

Doubling inputs will double outputs. Signup and view all the answers

What limitation is placed on the factors of production in the described model?

They can be used for both goods but cannot move between countries. Signup and view all the answers

Which of the following best describes the terms of trade necessary for Country X to engage in trade?

At least 2A for 1B. Signup and view all the answers

Which concept explains why trade may not occur even with absolute advantages?

Terms of trade affect the willingness to trade. Signup and view all the answers

What assumption about transportation costs is made in this production model?

There are no transportation costs. Signup and view all the answers

Study Notes

Introduction

International Economics covers the exchange of goods, services, factors of production, and capital across national boundaries
It focuses on flows such as goods, services, labor, and direct foreign investment between countries

Globalization of the World Economy

The first period of globalization occurred between 1870 and 1914, driven by the Industrial Revolution and opening up of new lands in North America, South America, Australia, New Zealand, and South Africa
The second period starting with the end of World War II in 1945 and lasting till around 1980 witnessed rapid growth in international trade due to the dismantling of trade protectionist policies

International Trade and the Nation's Standard of Living

The ratio of exports and imports of goods and services to the Gross Domestic Product (GDP) of a country is a measure of its economic relationship with other nations
It implies the levels of interdependence among nations, which has been increasing over the years

South Africa in World Trade

South Africa has a relatively open economy with an openness index exceeding 20%
The openness index, defined as exports as a percentage of the GDP, declined between 1985 and 1994 due to international sanctions imposed on the country
Despite sanctions, South Africa remained a major supplier of minerals, but financial sanctions led to capital flight and low growth

Why Nations Trade: The Classical Theory

This theory explores the reasons behind international trade using classical economic principles

Mercantilists' Views on Trade

Mercantilists believed in accumulating wealth through trade surpluses
It emphasized maximizing exports and minimizing imports to maintain a positive balance of trade

Classical Theorists

Adam Smith introduced the concept of absolute advantage. It states that a country should specialize and export goods it produces more efficiently than others
David Ricardo refined this idea with the theory of comparative advantage. This theory suggests that countries should specialize and export goods in which they have a lower opportunity cost of production, even if they don't have absolute advantage in any particular good

Gain from Trade

Specialization and trade based on comparative advantage allow countries to consume beyond their individual production possibilities frontier, leading to gains from trade.

Ricardian Theory

This theory rests on the assumption that labor is the only factor of production and is fully employed.
The theory assumes identical characteristics of goods consumed in both countries, perfect competition, and constant returns to scale
In this model, labor is mobile between different industries within a country but not between countries

Illustration of Absolute Advantage

The example highlights two countries, X and Y, with different productivities in goods A and B.
Country X is more efficient in producing good B, while Country Y is more efficient in producing good A (absolute advantage)

Autarky prices

Autarky prices are the domestic ratios at which goods exchange in the absence of trade; they represent the opportunity cost of one good in terms of the other.
In the example, Country X's autarky prices are 2A:1B, and Country Y's are 6A:1B.
Whether trade occurs depends on the final terms of trade, which is determined by the relative demand and supply of both countries' products.

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Description

This quiz explores key concepts in International Economics, including the exchange of goods and services across borders and the historical periods of globalization. It also examines the relationship between international trade and a nation's standard of living.