International Trade Theory

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Questions and Answers

How does the product life cycle theory explain the shift in production locations for manufactured goods over time?

The product life cycle theory proposes that production shifts from industrialized countries to developing countries as products mature and become standardized.

According to the Heckscher-Ohlin model, what determines the goods a country will export and import?

A country will export goods that utilize its abundant factors (labor, capital, land) and import goods that utilize its scarce factors.

What are the key differences between a free trade area, a customs union, and a common market?

A free trade area removes trade barriers among members, a customs union adds a common external trade policy, and a common market further allows free movement of labor and capital.

Explain how can trade lead to job displacement?

Increased import competition can lead to job losses in domestic industries that are unable to compete with lower-priced imports. Signup and view all the answers

What is the 'infant industry' argument for trade protection, and what are its potential drawbacks?

The infant industry argument supports protecting new industries until they can compete globally; drawbacks include potential for inefficiency and long-term dependence on protection. Signup and view all the answers

Explain the concept of comparative advantage using the idea of opportunity cost.

Comparative advantage exists when a country can produce a good at a lower opportunity cost than another country. Signup and view all the answers

How does the gravity model of trade explain trade patterns between countries?

The gravity model suggests that trade between two countries is proportional to their economic size (GDP) and inversely proportional to the distance between them. Signup and view all the answers

What is the main idea behind mercantilism, and why is it considered a flawed approach to trade?

Mercantilism advocates for maximizing exports and minimizing imports to accumulate wealth, but it is flawed because it views trade as a zero-sum game and hinders global economic growth. Signup and view all the answers

What does it mean for a country to have an improvement in its terms of trade, and what factors might cause this?

An improvement in terms of trade means a country can buy more imports with the same amount of exports. Factors include changes in world demand/supply, technological advancements, and exchange rates. Signup and view all the answers

Describe the Leontief Paradox and how it challenged the Heckscher-Ohlin model?

The Leontief Paradox found that U.S. exports were more labor-intensive and imports more capital-intensive, contradicting the Heckscher-Ohlin model's prediction that a capital-abundant country would export capital-intensive goods. Signup and view all the answers

Explain how "economies of scale" impacts international trade patterns, according to new trade theory?

Economies of scale encourage countries to specialize in a limited range of products and export to larger markets, allowing firms to lower average costs and increase efficiency. Signup and view all the answers

What are voluntary export restraints (VERs), and why might a country choose to implement them?

VERs are agreements where an exporting country voluntarily limits its exports, often to appease an importing country and avoid more restrictive trade policies like tariffs or quotas. Signup and view all the answers

Summarize Adam Smith's theory of absolute advantage and explain how it differs from Ricardo's theory of comparative advantage.

Smith's absolute advantage theory suggests countries should specialize in goods they produce more efficiently than others, while Ricardo's comparative advantage theory suggests specializing in goods with lower opportunity costs, even if they have an absolute advantage in everything. Signup and view all the answers

What are some potential negative impacts of trade on the environment, and how might these be mitigated?

Trade can lead to environmental degradation through increased production, pollution, and resource depletion. Mitigation strategies include environmental regulations, sustainable practices, and trade agreements with environmental provisions. Signup and view all the answers

How can trade promote economic growth?

Trade can promote economic growth by increasing specialization and efficiency, promoting technological diffusion, providing access to larger markets, increasing competition and promoting investment. Signup and view all the answers

What role do network effects play in explaining international trade patterns, according to new trade theory?

Network effects, where a product's value increases as more people use it, can lead to dominance of a few firms and countries in certain industries, influencing trade patterns. Signup and view all the answers

Explain the concept of factor price equalization and how it relates to the Heckscher-Ohlin model.

Factor price equalization suggests that trade can lead to equalization of factor prices (wages, interest rates) across countries, as trade in goods acts as a substitute for factor mobility. Signup and view all the answers

What is 'strategic trade policy,' and what are some of the arguments for and against its use?

Strategic trade policy involves government intervention to support domestic firms in industries with high growth potential and economies of scale. Arguments for include capturing first-mover advantages; arguments against include potential for rent-seeking and misallocation of resources. Signup and view all the answers

How do tariffs and quotas differ in their impact on trade and domestic prices?

Tariffs increase the price of imported goods through a tax, while quotas directly limit the quantity of imports. Tariffs generate revenue for the government, while quotas can lead to higher profits for importers with quota licenses. Signup and view all the answers

Explain how subsidies can distort international trade patterns.

Subsidies lower domestic producers' costs, making them more competitive in export markets and potentially displacing producers in other countries who do not receive such subsidies, thus distorting trade patterns. Signup and view all the answers

Flashcards

Mercantilism

Maximizing exports and minimizing imports to accumulate wealth, typically gold and silver.

Absolute Advantage

A country can produce a good using fewer resources than another country.