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What is the primary reason nations engage in trade?
What is the primary reason nations engage in trade?
What is a limitation of classical trade theories?
What is a limitation of classical trade theories?
According to the theory of absolute advantage, what should countries do?
According to the theory of absolute advantage, what should countries do?
What assumption is NOT part of classical trade theories?
What assumption is NOT part of classical trade theories?
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Which statement accurately represents the theory of comparative advantages?
Which statement accurately represents the theory of comparative advantages?
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What is the meaning of 'aLp' in the context of absolute advantage?
What is the meaning of 'aLp' in the context of absolute advantage?
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What does the concept of perfect mobility of production factors suggest?
What does the concept of perfect mobility of production factors suggest?
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In classical trade theories, what is the primary view of international trade?
In classical trade theories, what is the primary view of international trade?
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Who first introduced the model of a two-factor economy?
Who first introduced the model of a two-factor economy?
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What is defined as capital-intensive in production?
What is defined as capital-intensive in production?
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According to the two-factor model, what will a capital-abundant country export?
According to the two-factor model, what will a capital-abundant country export?
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What is the primary function of import licenses in international trade?
What is the primary function of import licenses in international trade?
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What was the key finding of the Leontief Paradox?
What was the key finding of the Leontief Paradox?
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Which theorem is associated with the empirical evidence of the Heckscher-Ohlin model?
Which theorem is associated with the empirical evidence of the Heckscher-Ohlin model?
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What is a quota in the context of international trade?
What is a quota in the context of international trade?
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What is indicated by technological theories in the context of trade?
What is indicated by technological theories in the context of trade?
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Which of the following is considered a pro of free trade?
Which of the following is considered a pro of free trade?
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Which argument against free trade supports the protection of emerging industries?
Which argument against free trade supports the protection of emerging industries?
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Which of the following is NOT a type of technological innovation mentioned?
Which of the following is NOT a type of technological innovation mentioned?
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What does the term 'embargo' refer to in international trade?
What does the term 'embargo' refer to in international trade?
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How did the large volume of international trade in the 19th and 20th centuries relate to the Heckscher-Ohlin model?
How did the large volume of international trade in the 19th and 20th centuries relate to the Heckscher-Ohlin model?
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What was the pioneer work in the field of economic integration attributed to?
What was the pioneer work in the field of economic integration attributed to?
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Which of the following describes a closed economy?
Which of the following describes a closed economy?
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What does international economic integration primarily aim to eliminate?
What does international economic integration primarily aim to eliminate?
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What does balanced growth refer to in the context of economic growth?
What does balanced growth refer to in the context of economic growth?
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What is a key assumption of the theory of comparative advantages regarding labour mobility?
What is a key assumption of the theory of comparative advantages regarding labour mobility?
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How does imbalanced growth affect the production possibilities frontier (PPF)?
How does imbalanced growth affect the production possibilities frontier (PPF)?
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Which type of growth biases toward the good a country exports?
Which type of growth biases toward the good a country exports?
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According to Ricardo's trading principle, what basis for trade arises between countries?
According to Ricardo's trading principle, what basis for trade arises between countries?
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What does technological gap theory primarily explain?
What does technological gap theory primarily explain?
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What does the calculation of comparative advantages primarily compare?
What does the calculation of comparative advantages primarily compare?
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What effect does innovation have on international trade according to technological gap theory?
What effect does innovation have on international trade according to technological gap theory?
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Which of the following is NOT an assumption of the theory of comparative advantages?
Which of the following is NOT an assumption of the theory of comparative advantages?
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What is the impact of Mill's theory of reciprocal demand on countries with lower productivity?
What is the impact of Mill's theory of reciprocal demand on countries with lower productivity?
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What is the result of import-biased growth on a country's terms-of-trade?
What is the result of import-biased growth on a country's terms-of-trade?
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In the context of the theory of comparative advantages, which condition is assumed regarding transport costs?
In the context of the theory of comparative advantages, which condition is assumed regarding transport costs?
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What does the concept of 'immiserizing growth' imply?
What does the concept of 'immiserizing growth' imply?
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Which aspect does the theory of comparative advantages focus heavily on?
Which aspect does the theory of comparative advantages focus heavily on?
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Which factor is NOT part of the effects analyzed in economic growth theory?
Which factor is NOT part of the effects analyzed in economic growth theory?
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What do the fixed resources and tastes imply in the theory of comparative advantages?
What do the fixed resources and tastes imply in the theory of comparative advantages?
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What is the primary reason for countries to engage in intraindustry trade?
What is the primary reason for countries to engage in intraindustry trade?
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Which factor influences the dominance of intraindustry trade between two similar countries?
Which factor influences the dominance of intraindustry trade between two similar countries?
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What is a characteristic of passive foreign trade policy?
What is a characteristic of passive foreign trade policy?
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What type of trade occurs when two countries trade products belonging to different industries?
What type of trade occurs when two countries trade products belonging to different industries?
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Which of the following is an example of an instrument affecting the price of goods in foreign trade policy?
Which of the following is an example of an instrument affecting the price of goods in foreign trade policy?
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What are the main goals of active foreign trade policy?
What are the main goals of active foreign trade policy?
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Which trade policy instrument is designed to limit the quantity of goods traded?
Which trade policy instrument is designed to limit the quantity of goods traded?
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What happens to intraindustry trade when there is a significant difference in capital-labor ratios between countries?
What happens to intraindustry trade when there is a significant difference in capital-labor ratios between countries?
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Which of the following represents a trade restriction measure?
Which of the following represents a trade restriction measure?
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Passive foreign trade policy primarily aims to protect which aspect?
Passive foreign trade policy primarily aims to protect which aspect?
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Study Notes
Nations Trade Due to Differences
- Nations trade because they are different and want to take advantage of their differences.
Classical Theory Limitations
- Simplified models with abstract assumptions
- Static view on comparative advantages
- Analysis of only the supply side of the market
- Failure to identify causes of cost differences
- Failure to explain incomplete specialization
Classical Trade Theories
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Common Assumptions:
- Model 2x2x1 (2 countries, 2 products, 1 factor of production – labor)
- Labor theory of value
- Constant costs
- Perfect competition
- Full employment
- Free trade
- Zero transportation costs
- Product prices expressed in physical units (not monetary)
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Theory of Absolute Advantage:
- Each country specializes in producing the good it can produce most efficiently (at the lowest cost)
- International trade is a positive-sum game, benefiting all countries involved
- Assumes: perfect mobility of factors within and between countries; considers only the supply side of the market.
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Theory of Comparative Advantage:
- Each country should specialize in producing the good it can produce relatively more efficiently compared to other goods
- International trade is a positive-sum game, distributing gains among participating countries.
- Assumes: perfect mobility of factors within, but not between, countries; fixed, but different, technology between countries; fixed resources and tastes; considers only the supply side of the market
How to Calculate Comparative Advantages
- Comparing the ratios of production costs for two different products within each of the two countries.
- aLx/aLy: aLxf/aLyf
- aLx = labor cost to produce product x in the domestic country
- aLy = labor cost to produce product Y in the domestic country
- aLxf = labor cost to produce product X in the foreign country
- aLyf = labor cost to produce product Y in the foreign country
- aLx/aLy: aLxf/aLyf
Theory of Reciprocal Demand
- Each country's production and export prices depend on the reciprocal demand for goods of other countries.
- Countries with lower productivity can still benefit from trade.
Neoclassical Trade Theories
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Common Assumptions:
- Abandonment of the labor theory of value (2/3 factors of production)
- Costs expressed in monetary units
- Both constant and variable costs
- Complete and incomplete specialization
- Transportation costs
Differences in Neoclassical Theories
- Two- or multifactor models
- Abandonment of the labor theory of value
- Costs expressed in monetary terms instead of physical units
- Both constant and variable costs
- Complete and incomplete specialization
- Transportation costs
Opportunity Costs Theory
- A country has a comparative advantage in a product if it can produce it at a lower opportunity cost (in terms of other products) compared to trading with other countries.
Technological Theories
- Continuous movement of production possibility frontiers due to increases in factor supply and efficient factor utilization.
- Technological differences between countries as a basis for trade
Theory of Economies of Scale
- Average costs decline as output increases.
- Internal economies of scale: average costs decrease as the size of individual companies increase.
- External economies of scale: average costs decrease as the size of the industry increases
Theory of Comparative Advantage of Nations
- Productivity as the key determinant of international competitiveness.
- Industry or company focus
- Combines elements of supply-side and demand-side market analysis
Inter- and Intra-Industry Trade
- Inter-industry trade: Trade in products belonging to different industries.
- Intra-industry trade: Trade in products within the same industry.
Passive and Active Foreign Trade Policies
- Passive policies: Protect domestic producers, consumers, and the balance of payments.
- Active policies: Promote production, employment, and exports.
Tariffs
- Definition: A tax on imported goods.
-
Types:
- Ad valorem tariffs (percentage of the value)
- Specific tariffs (fixed amount per unit)
- Compound tariffs (combination of both)
- Tariffs by country of origin
- Unitary tariffs
- Differential tariffs
- Tariffs for equalizing
- Anti-dumping tariffs
- Countervailing tariffs
-
Effects:
- Reduce imports, increase domestic production, and generate revenue. Can negatively affect domestic consumers and cause retaliation from other countries.
Non-Tariff Barriers
- Quotas, import licenses, embargoes, sanctions, and other restrictions.
Other Trade Theories
- Heckscher-Ohlin (H-O) Theory: Trade is driven by differences in relative factor endowments (e.g., labor, capital).
- Leontief Paradox: Empirical evidence doesn't always support the H-O theory.
- Product Life Cycle Theory: Products may progress in different stages of production and marketing across countries.
Theory of Economic Integration
- Process or stage of institutional integration of countries, often at a regional level.
- Aims to reduce restrictions on trade, payments, and factor movements.
- Types of integration: Free Trade Area (FTA), Customs Union (CU), Common Market (CM), Economic Union
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Description
Explore the fundamentals of international trade theories including classical theory limitations and assumptions. Understand how nations trade based on their differences and the implications of absolute advantage. This quiz covers key concepts that shape global commerce.
