International Trade: Theory and Practice

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

According to Adam Smith's theory of comparative advantage, why is it economically beneficial for a country to import a commodity?

To reduce unemployment in the importing country

To obtain the commodity at a cheaper price (correct)

To increase domestic production of the commodity

To maintain self-sufficiency in commodity production

What does the Heckscher-Ohlin theorem suggest about countries' export goods?

Countries export goods made with their scarce factor

Countries export goods based on consumer preferences

Countries export goods made with their abundant factor (correct)

Countries export goods made with foreign factors

What are the factors of production according to the text?

Land, labor, and capital (correct)

Land, money, and technology

Labor, technology, and capital

Labor, resources, and infrastructure

What do protectionist policies aim to do?

Protect domestic industries from foreign competition Signup and view all the answers

Why do some export-oriented sectors support freer trade?

They benefit from access to larger markets Signup and view all the answers

What was the goal of GATT?

To lower barriers without aiming for complete liberalization Signup and view all the answers

How did political institutions affect power over trade policy?

They can favor representation of narrow or broad interests Signup and view all the answers

What is the role of international institutions in trade?

To facilitate cooperation and promote liberalization Signup and view all the answers

What is the most favored nation principle in trade agreements?

Every trading partner should be treated like the favored trading partner, no discrimination Signup and view all the answers

What is the main difference between GATT and WTO?

WTO had larger membership and can enforce its provisions, while GATT could not enforce its provisions Signup and view all the answers

What is the impact of national institutions on conflicting interests in trade?

They shape outcomes over conflicting interests. Signup and view all the answers

How does international trade resemble a prisoner's dilemma?

Governments want to promote more exports while also wanting to protect domestic markets. Signup and view all the answers

What is the purpose of international institutions monitoring and enforcement?

To prevent breach of initial trade agreements through substantial punishments. Signup and view all the answers

What is the impact of democracies on trade policies?

Democracies are less protectionist than dictatorships. Signup and view all the answers

What was the reason for replacing GATT with WTO?

With more members, a stronger institution was needed. Signup and view all the answers

According to the Heckscher-Ohlin trade theory, a country should specialize in producing goods based on what factor?

Relative abundance of resources Signup and view all the answers

What is the main benefit of division of labor in international trade?

Greater efficiency Signup and view all the answers

Which concept advocates that a country should produce what it can produce best given its resources?

Comparative advantage Signup and view all the answers

What is the main reason for countries to engage in international trade according to the text?

Mutual benefit Signup and view all the answers

What does specialization in international trade allow each country to do?

Concentrate on areas of advantage Signup and view all the answers

According to the Heckscher-Ohlin trade theory, what should a country with abundant agricultural resources focus on?

Agricultural production Signup and view all the answers

What is the main reason for countries to restrict trade according to the text?

Protect domestic industries Signup and view all the answers

In international trade, what does absolute advantage refer to?

One country's efficiency over another in a specific product Signup and view all the answers

What does the law of comparative advantage advise countries to do?

Produce what they can produce best given their resources Signup and view all the answers

International trade policies are a result of strategic interaction amongst _______.

states Signup and view all the answers

Trade liberalization is good for a nation's _______.

economy Signup and view all the answers

The World Trade Organization (WTO) replaced GATT in _______.

1994 Signup and view all the answers

National treatment principle in trade agreements states that when foreign goods come in, they should be treated like domestically produced goods, with the same _______.

regulations Signup and view all the answers

_______ can be costly for countries, and trade restrictions can be influenced by various actors.

Wars Signup and view all the answers

Export-oriented sectors generally favor ______ trade, while import-competing sectors favor protectionism.

freer Signup and view all the answers

Some countries, particularly those with abundant land for agriculture, can be more open to trade due to their ______ advantage.

comparative Signup and view all the answers

International trade promotes ______ beneficial exchange of goods and services

mutually Signup and view all the answers

Specialization in international trade allows each country to focus on what it does ______

best Signup and view all the answers

The law of comparative advantage advises countries to produce what they can produce best given their ______

resources Signup and view all the answers

Study Notes

Adam Smith's theory of comparative advantage: if a country can obtain a commodity cheaper from another country, it's economically beneficial to import that commodity.
Division of labor and specialization leads to increased productivity.
Comparative advantage depends on a country's inherent endowments and those of its trade partners.
Factors of production: land, labor, and capital.
Trade is mutually beneficial but is often restricted due to various reasons and actors.
Trade restrictions include tariffs, quotas, nontariff barriers, and subsidies.
Protectionism vs. free trade: winners and losers of international trade.
Foreign trade hurts domestic producers, leading to protectionist policies.
Factor-based preferences: the Heckscher-Ohlin theorem states that countries export goods made with their abundant factor, and thus prefer free trade.
Specific factors-based preferences: when factors are tied to industries, trade affects all factors in the same way, and export industries benefit from freer trade.
Winners and losers of free trade/protectionism: protectionism benefits domestic protected industries, while consumers, foreign producers, and domestic exporters lose.
Compensation for the losers of free trade: some gains from trade can be used to compensate the losers, weakening their opposition to free trade.
Export-oriented sectors want freer trade, while import-competing sectors want protectionism.
Patterns of trade restrictions: some actors have political power over trade policy, creating a collective action problem. Policy change can be seen as a public good for a group.
Consumers, who are the largest group, exercise less influence than producers.
Foreign producers have limited political clout.
Adam Smith advocates for comparative advantage, encouraging countries to specialize and trade for mutual benefit.
Comparative advantage depends on a country's endowments and those of its trading partners.
Factors of production include land, labor, and capital.
Trade restrictions, such as tariffs, quotas, and subsidies, exist despite the potential negative effects on welfare and productivity.
Wars can be costly for countries, and trade restrictions can be influenced by various actors.
Protectionist policies can be driven by domestic preferences, particularly for countries with abundant or specific factors.
Winners and losers of free trade include domestic producers, consumers, and foreign producers.
Compensation for the losers of free trade can weaken their opposition and promote support for freer trade.
Patterns of trade restrictions can be influenced by political power and policy change.
Collective action problems and policy change can impact the implementation of trade policies.
Consumers, as the largest group, generally have less influence on trade policies compared to producers.
Foreign producers can have limited political clout.
Export-oriented sectors generally favor freer trade, while import-competing sectors favor protectionism.
The losers of free trade include consumers of imported goods, foreign producers, and domestic exporters.
Politicians promoting protectionist policies can face backlash from citizens opposed to such policies.
Compensation for the losers of free trade can take various forms, such as worker retraining programs and unemployment benefits.
Some countries, particularly those with abundant land for agriculture, can be more open to trade due to their comparative advantage.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Explore the fundamentals of international trade, including the concept of trade being mutually beneficial, the reasons why countries restrict trade, and the influence of international institutions on trade. Delve into the Heckscher-Ohlin trade theory and the advantages of trade for countries' GDP growth and efficiency.