International Trade and Comparative Advantage
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Questions and Answers

What is the main principle behind the movement of workers in a country according to international specialization of labor?

Workers move from the less productive sector to the more productive one.

Why is complete specialization on one good considered unrealistic in economic models?

Complete specialization is unrealistic because countries often produce multiple goods rather than focusing solely on one.

What assumptions can make the Ricardian model applicable across multiple countries and goods?

The model can be applied under simple assumptions such as constant marginal costs and comparative advantage.

In what scenarios does the Ricardian model's assumptions become contested?

<p>The assumptions are contested with domestic distortions, increasing returns, and complex external factors.</p> Signup and view all the answers

What role does comparative advantage play according to the Ricardian model?

<p>Comparative advantage is crucial as it underpins the potential gains from trade between countries.</p> Signup and view all the answers

What is the main distinction made between bilateral and multilateral economic relations?

<p>The main distinction is that bilateral trade lowers the probability of war between two countries, while multilateral trade openness increases the likelihood of bilateral conflicts.</p> Signup and view all the answers

How does multilateral trade liberalization affect bilateral inter-dependence?

<p>Multilateral trade liberalization reduces the degree of bilateral inter-dependence between countries.</p> Signup and view all the answers

According to the findings, what impact does war have on trade?

<p>War increases bilateral trade costs more than multilateral trade costs, thereby reducing trade exchanges.</p> Signup and view all the answers

What prediction was tested regarding globalization and conflict probabilities?

<p>The prediction tested was that globalization decreases the probability of global conflicts but increases the likelihood of bilateral conflicts.</p> Signup and view all the answers

What database did the researchers utilize to analyze conflicts between countries?

<p>The researchers utilized the Correlates of War project database to analyze the occurrence of militarized interstate disputes (MIDs).</p> Signup and view all the answers

How does income inequality across countries persist in the context of trade?

<p>Income inequality persists due to the lack of perfect equalization of the returns to factors of production, despite trade being beneficial compared to autarky.</p> Signup and view all the answers

What is the main principle behind Paul Krugman's concept of comparative advantage?

<p>The main principle is that countries should specialize in producing goods and services where they have a relative efficiency, rather than competing against each other on all fronts.</p> Signup and view all the answers

What are some misconceptions regarding the disadvantages of an open market?

<p>Misconceptions include the belief that a nation gains from trade only if its firms are more competitive, that foreign competition is unfair due to low wages, and that trade exploits countries with lower worker wages.</p> Signup and view all the answers

What factors determine country-by-country specialization in trade?

<p>Specialization is determined by local endowments of production factors, technologies, production methods, economies of scale, and barriers to circulation of goods and services.</p> Signup and view all the answers

What role does the WTO play in the context of global trade and the liberal order?

<p>The WTO facilitates trade by creating agreements to reduce tariffs and taxes in a predictable way, acting as a cornerstone of the post-war liberal order.</p> Signup and view all the answers

What is the opportunity cost of cheese in terms of wine for Home?

<p>$1/3$</p> Signup and view all the answers

Which country has an absolute advantage in the production of both cheese and wine?

<p>Foreign</p> Signup and view all the answers

How does trade affect wages in the industry with a comparative advantage?

<p>Wages become higher in the industry with a comparative advantage.</p> Signup and view all the answers

What happens to the relative prices of goods when two countries open up for trade?

<p>Relative prices equalize to a level between the autarky prices.</p> Signup and view all the answers

Why is it beneficial for countries to specialize in the goods in which they have a comparative advantage?

<p>It allows for greater overall production and efficiency.</p> Signup and view all the answers

In terms of efficiency, how does Home compare to Foreign in producing cheese?

<p>Home is relatively less efficient in cheese than Foreign.</p> Signup and view all the answers

Calculate the opportunity cost of wine in terms of cheese for Foreign.

<p>$2$</p> Signup and view all the answers

What is the relative productivity of Foreign in producing wine versus cheese?

<p>Foreign is relatively more productive in wine.</p> Signup and view all the answers

What are two main benefits for firms that outsource production abroad?

<p>Access to better technology and cost advantages.</p> Signup and view all the answers

How does economic interdependence differ from the liberal hypothesis?

<p>Economic interdependence focuses on actual interconnections in production processes, while the liberal hypothesis centers on mutual benefits from exchanging final products.</p> Signup and view all the answers

Define a global value chain (GVC).

<p>A GVC is a series of stages in producing a product or service sold to consumers, with stages produced in at least two different countries.</p> Signup and view all the answers

What role does foreign value added play in production?

<p>Foreign value added is crucial as it indicates the extent to which a firm incorporates global resources in its production process.</p> Signup and view all the answers

What are the two structural types of global value chains mentioned?

<p>Spider-like structures and snake-like structures.</p> Signup and view all the answers

What must a company decide when managing production stages?

<p>A company must decide what production stages to 'make' in-house and what to 'buy' from abroad.</p> Signup and view all the answers

What is the expected correlation between inward FDI and GVC participation?

<p>A positive cross-country correlation is expected between the stock of inward FDI and GVC participation.</p> Signup and view all the answers

Explain the significance of 'carry-along trade' in relation to GVCs.

<p>'Carry-along trade' does not contribute significantly to GVCs as it does not involve genuine production stages.</p> Signup and view all the answers

What is endogeneity in the context of economic sanctions and conflict?

<p>Endogeneity refers to the situation where the effect of an independent variable on a dependent variable is not clearly interpretable due to the presence of omitted variables that cause bias in the estimates.</p> Signup and view all the answers

Why is the issue of omitted variables important in analyzing trade and war?

<p>Omitted variables can lead to biased estimates, making it difficult to establish a clear causal relationship between trade and war outcomes.</p> Signup and view all the answers

What does self-selection imply in the context of countries engaging in trade and conflict?

<p>Self-selection implies that countries choose whether to engage in trade or conflict based on certain criteria, which complicates the analysis of their interactions.</p> Signup and view all the answers

How did early empirical studies view the relationship between trade and political conflicts?

<p>Early empirical studies generally found that trade inhibits political conflicts, supporting the liberal hypothesis.</p> Signup and view all the answers

What was Barbieri's (1996) contribution to the understanding of trade and conflict?

<p>Barbieri found that when accounting for trade asymmetries and national vulnerabilities, interdependence is positively related to dyadic conflict, opposing the liberal hypothesis.</p> Signup and view all the answers

What is the significance of including observable third factors in multivariate estimations?

<p>Including observable third factors helps to clarify the relationship between trade and peace by controlling for other influencing variables.</p> Signup and view all the answers

What challenges arise from the infrequent observation of wars and military conflicts?

<p>The infrequent observation of wars and military conflicts poses challenges for empirical studies, as it limits the data available for analysis and biases the results of conflict prevalence.</p> Signup and view all the answers

According to Martin Meyer Thoenig (2008), what is a key reason for the lack of clear evidence supporting the liberal hypothesis?

<p>Thoenig's work suggests that the lack of clear evidence supporting the liberal hypothesis may stem from the complexities and variability of the relationships between trade and conflict.</p> Signup and view all the answers

Flashcards

Comparative Advantage

The idea that countries specialize in producing goods where they have a relative advantage, leading to higher overall production and trade gains.

Ricardian Model

A model that explains trade patterns based on differences in relative productivity between countries. It assumes constant marginal costs and complete specialization.

Consistent Assumptions

Assumptions that are consistent with comparative advantage include restrictions on trade, trade costs, and variety of goods/services.

Non-consistent Assumptions

Assumptions that challenge comparative advantage include domestic distortions like market power or externalities, and increasing returns in production.

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Heckscher-Ohlin Model

This model focuses on differences in factor endowments (like labor or capital) to explain trade patterns. Countries export goods that use their abundant factors of production.

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What is Bilateral Trade?

In international relations, bilateral trade refers to the exchange of goods and services between two countries only. For example, the US and China engaging in trade.

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What is Multilateral Trade?

Multilateral trade involves the exchange of goods and services between multiple countries through agreements and organizations like the World Trade Organization (WTO).

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How does the Gravity Model work?

The gravity model of trade assumes that countries with larger economies and closer geographic proximity tend to trade more with each other.

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How does trade affect conflict?

The study found that bilateral trade reduces the likelihood of conflicts between two countries, while multilateral trade increases the risk of such conflicts.

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How does conflict impact bilateral trade?

Military conflicts lead to higher costs for bilateral trade, reducing exchanges between countries involved in conflict.

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Unit Labor Requirement

The amount of labor needed to produce one unit of a good. A lower unit labor requirement indicates higher productivity.

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Labor Productivity

The quantity of goods produced per unit of labor input. It's the inverse of the unit labor requirement.

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Opportunity Cost

The amount of one good that must be given up to produce one additional unit of another good. It reflects the relative cost of production.

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Absolute Advantage

When a country can produce a good using fewer resources than another country. It implies efficiency in production.

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Specialization and Trade

A situation where countries only produce and trade goods in which they have a comparative advantage. This leads to overall economic gains.

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Autarky Prices

The prices of goods in a closed economy without international trade. These prices reflect domestic costs and demand.

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Price Equalization

The process of converging prices in a two-country model due to trade. This leads to a more efficient allocation of resources.

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Distributive Effects of Trade

A situation where international trade can lead to significant income differences between countries, sectors, and factors of production, even if trade overall benefits all parties compared to no trade.

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WTO Agreements

A legal agreement between countries that sets rules and regulations for international trade, aiming to reduce tariffs and other trade barriers.

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Trade Benefits Even with Lower Competition

The idea that nations gain from trade even if their firms are less competitive than foreign ones, as long as they specialize in their comparative advantage.

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Liberal Order

A global economic system based on free trade, limited government intervention, and a commitment to international cooperation, often associated with the WTO.

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Omitted Variables (OV)

Factors influencing conflict and trade that are not included in a study, leading to inaccurate results.

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Self-Selection (SS)

When countries choose to participate in trade or conflict based on their own circumstances, leading to biased results.

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Reverse Causality (RV)

When the relationship between trade and conflict is reversed; conflict causes trade, not the other way around.

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Endogeneity

A problem in research where the effect of one variable on another cannot be accurately determined due to omitted factors.

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Simple Correlations and Studies

Studies that examine trade and conflict without fully addressing omitted variables, self-selection, or reverse causality often lead to inaccurate conclusions.

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Multivariate Estimation

Including additional variables in a study to control for other factors, helping to isolate the true relationship between trade and conflict.

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Liberal Hypothesis

The theory that trade between countries promotes peace, making conflict less likely because of shared economic interests.

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Trade and Conflict: No Clear Evidence

There is no clear evidence to fully support the liberal hypothesis, which suggests that trade promotes peace, due to the complexities of endogeneity.

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Benefits of Outsourcing Production Abroad

Firms can benefit from outsourcing production abroad by gaining access to more advanced technology, exploiting cost advantages, accessing local resources, being closer to major markets, and potentially reducing tax burdens.

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Fewer Suppliers in Global Production

The concentration on suppliers offering the most significant advantages leads to a smaller number of suppliers for a given firm.

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Economic Interdependence in Global Production

Economic interdependence arises from globalized production processes, where different stages of production are distributed across countries.

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Global Value Chain (GVC)

A global value chain (GVC) involves multiple stages of production for a product or service, with at least two stages occurring in different countries. A firm is part of a GVC if it participates in at least one stage within this chain.

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Key Aspect of Global Value Chains: Foreign Value Added

The use of foreign value added in production is crucial for defining a global value chain, regardless of whether it involves raw materials, intermediate inputs, or services. Pure intermediation (carry-along trade) doesn't contribute to GVCs.

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Configurations of Global Value Chains

Global value chains can be structured in various ways, with common examples being 'spider-like' structures (multiple parts converging at one assembly point) and 'snake-like' structures (sequential production stages).

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Global Production Networks: Segmentation and Allocation

The development of global production networks occurs when production is segmented into stages and distributed across the globe.

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Firm-Level Decisions on Making vs. Buying in GVCs

Companies decide which production stages to perform internally (make) and which to outsource (buy) from domestic or foreign suppliers. This decision has implications for foreign direct investment (FDI) and trade patterns.

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Study Notes

Economic Security

  • Security is the protection of national interests from loss
  • Economic security is the interception between elements, e.g., electric vehicles
  • The Draghi report addressed economic security issues

Liberal World Order and Trade Integration

  • Globalization is the interconnection and interdependence among people, firms, and institutions
  • Trade in goods and services is most positively affected by globalization
  • Globalization of ideas and activities is also affected by these factors
  • Trade fosters specialization and rising incomes
  • Restrictions on free trade can reduce well-being

Liberal Approach

  • Globalization is the evolution of interconnected networks
  • Interdependence creates reciprocal vulnerabilities and cooperation opportunities
  • Peace allows for closer integration among countries
  • International openness, multilateralism, and rules-based relations are core ideas
  • Democratic solidarity and cooperative security are essential for progressive social purposes globally and domestically

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Economic Security (25/09/2024)

Description

This quiz explores key concepts of international trade, including the Ricardian model, comparative advantage, and the effects of specialization on economies. Participants will delve into the implications of trade liberalization, the relationship between income inequality and trade, and the impact of conflict on globalization. The quiz aims to enhance understanding of how economic principles influence global relations.

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