Modern Trade Theories Overview
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Questions and Answers

Countries with similar factor endowments (labor and capital), like those described in the Heckscher-Ohlin Theory, are likely to specialize in the production of the same goods.

False (B)

The Gravity Model of Trade focuses on technological advancements and economies of scale as key factors in determining trade patterns.

False (B)

Modern trade theories like the Heckscher-Ohlin Theory and the New Trade Theory aim to completely replace classical trade ideas.

False (B)

A country with a comparative advantage in producing a good should always specialize in that good, regardless of its opportunity cost.

<p>False (B)</p> Signup and view all the answers

If Country A has an abundance of capital and Country B has an abundance of labor, Country A is likely to specialize in labor-intensive products and export them.

<p>False (B)</p> Signup and view all the answers

The New Trade Theory suggests that industries with increasing returns to scale can lead to trade, even between similar countries.

<p>True (A)</p> Signup and view all the answers

Modern trade theories do not take into account the role of multinational corporations or global supply chains.

<p>False (B)</p> Signup and view all the answers

New Trade Theory, pioneered by Paul Krugman, emphasizes the significance of economies of scale and network effects in shaping international trade patterns.

<p>True (A)</p> Signup and view all the answers

The Gravity Model of Trade predicts that trade flows between two countries are inversely proportional to their respective Gross Domestic Products (GDPs).

<p>False (B)</p> Signup and view all the answers

According to New Trade Theory, product differentiation and brand loyalty play a negligible role in driving international trade.

<p>False (B)</p> Signup and view all the answers

The Gravity Model of Trade is an analytical tool for predicting trade flows based on the economic size and geographical distance between two economies.

<p>True (A)</p> Signup and view all the answers

New Trade Theory suggests that industries with increasing returns to scale are less likely to concentrate in specific countries.

<p>False (B)</p> Signup and view all the answers

The WTO's main goal is to eliminate all tariffs on imported goods.

<p>False (B)</p> Signup and view all the answers

The Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement focuses on promoting free trade in services.

<p>False (B)</p> Signup and view all the answers

The Gravity Model of Trade is based on the assumption that trade flows are directly proportional to the distance between two economies.

<p>False (B)</p> Signup and view all the answers

In the Heckscher-Ohlin Theory, countries with an abundance of capital and advanced technology have a comparative advantage in labor-intensive industries.

<p>False (B)</p> Signup and view all the answers

Classical theories of trade, unlike New Trade Theory, emphasize the importance of economies of scale and network effects.

<p>False (B)</p> Signup and view all the answers

The WTO's annual report indicated that the organization has successfully facilitated hundreds of trade agreements.

<p>True (A)</p> Signup and view all the answers

The IMF was established in 1947 to promote global monetary cooperation and reduce poverty.

<p>True (A)</p> Signup and view all the answers

The Gravity Model of Trade suggests that transportation costs have a negligible impact on trade flows.

<p>False (B)</p> Signup and view all the answers

New Trade Theory states that trade is primarily driven by traditional comparative advantage.

<p>False (B)</p> Signup and view all the answers

Brazil has an absolute advantage in coffee production because of its fertile land and favorable climate.

<p>True (A)</p> Signup and view all the answers

The primary function of the IMF is to provide technical assistance to developing countries in trade negotiations.

<p>False (B)</p> Signup and view all the answers

New Trade Theory, developed by Paul Krugman, assumes perfect competition and constant returns to scale.

<p>False (B)</p> Signup and view all the answers

The WTO's efforts to harmonize trade rules have had a significant impact on the growth of global trade.

<p>True (A)</p> Signup and view all the answers

The U.S. benefits from trading oil even though it can produce it efficiently, because of the principle of comparative advantage.

<p>True (A)</p> Signup and view all the answers

The IMF only monitors the global economy and does not intervene in individual countries' economic policies.

<p>False (B)</p> Signup and view all the answers

The Gravity Model of Trade states that countries with larger economies and closer proximity trade more with each other.

<p>True (A)</p> Signup and view all the answers

International trade is influenced solely by the comparative advantage of nations.

<p>False (B)</p> Signup and view all the answers

The WTO's monitoring of member countries' trade policies is intended to encourage only transparency.

<p>False (B)</p> Signup and view all the answers

The General Agreement on Trade in Services (GATS) focuses on setting global standards for protecting intellectual property rights.

<p>False (B)</p> Signup and view all the answers

According to the Heckscher-Ohlin theory, Mexico's abundant labor supply makes it competitive in capital-intensive industries like aerospace manufacturing.

<p>False (B)</p> Signup and view all the answers

International organizations like the World Trade Organization aim to create a framework for cooperation and regulate trade practices.

<p>True (A)</p> Signup and view all the answers

The WTO is a regulatory body that operates under the auspices of the IMF.

<p>False (B)</p> Signup and view all the answers

Countries with absolute advantage in certain goods can still benefit from trade based on comparative advantage.

<p>True (A)</p> Signup and view all the answers

The New Trade Theory emphasizes the role of economies of scale and brand loyalty in influencing international trade.

<p>True (A)</p> Signup and view all the answers

Tariffs are designed to make imported goods more competitive compared to domestic products.

<p>False (B)</p> Signup and view all the answers

Trade agreements can be considered a type of trade policy tool.

<p>True (A)</p> Signup and view all the answers

The main goal of trade policies is to maximize imports and minimize exports.

<p>False (B)</p> Signup and view all the answers

Subsidies involve restricting the quantity of specific goods imported.

<p>False (B)</p> Signup and view all the answers

Trade policies can lead to increased market access for exporters.

<p>False (B)</p> Signup and view all the answers

Flashcards

Trade Policies

Regulations by governments to control international trade and protect domestic industries.

Tariffs

Taxes imposed by governments on imported goods to make them costlier than domestic products.

Subsidies

Financial assistance provided by governments to support domestic industries and reduce their costs.

Import Quotas

Limits set by a government on the quantity of specific goods that can be imported.

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Trade Protectionism

Economic policy aimed at shielding domestic industries from foreign competition through trade barriers.

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New Trade Theory

A theory emphasizing economies of scale and network effects in trade patterns, challenging classical trade theories.

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Economies of Scale

A situation where the cost per unit decreases as production increases due to more efficient use of resources.

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Concentration of Industries

The tendency for certain industries to be concentrated in specific countries due to large-scale production advantages.

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Product Differentiation

The process of making products distinct from one another to attract consumers, despite minimal cost differences.

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Brand Loyalty

The tendency of consumers to continue buying a specific brand due to positive experiences or perception.

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Gravity Model of Trade

A model predicting trade flows based on the economic size of countries and the distance between them, similar to physical gravity.

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Trade Flow Factors

Elements influencing trade volumes, including market size and transportation costs.

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Market Size

The capacity of a country to produce goods, influenced by its GDP, affecting its trade potential.

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Transportation Costs

Expenses incurred to transport goods from one location to another, affecting trade activities.

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Trade Policy Review

A WTO mechanism to monitor and assess member countries' trade policies for compliance and transparency.

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Capacity Building

WTO's assistance to developing countries for improving trade negotiation skills and understanding agreements.

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GATT

General Agreement on Tariffs and Trade, aimed at reducing tariffs and trade barriers.

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TRIPS

Agreement on Trade-Related Aspects of Intellectual Property Rights, setting global IP protection standards.

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GATS

General Agreement on Trade in Services, establishing international trade rules for services.

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WTO Role in Global Trade

The WTO shapes global trade rules, promotes liberalization, and encourages economic growth.

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Trade Barrier Reduction

WTO's efforts to lower tariffs and improve access to markets for members.

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Dispute Resolution Mechanism

A WTO function that provides a framework for resolving trade disagreements between countries.

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IMF Purpose

International Monetary Fund promotes global cooperation and financial stability while reducing poverty.

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IMF Surveillance

Monitoring of global and national economies to ensure financial stability by the IMF.

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Absolute Advantage

When a country can produce a good more efficiently than others.

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Comparative Advantage

When a country produces goods at a lower opportunity cost than others.

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Heckscher-Ohlin Theory

Trade theory stating that countries export what they can produce abundantly.

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Labor-Intensive Industries

Sectors that require a large amount of labor to produce goods.

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Capital-Intensive Industries

Sectors that require significant capital or technology to produce goods.

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International Trade Organizations

Institutions that regulate and facilitate international trade among countries.

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Opportunity Cost

The value of the next best alternative forgone when making a choice.

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Factor Endowments

The quantities of labor, capital, and natural resources available in a country.

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Labor-Intensive Products

Goods that require a high amount of labor to produce.

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Capital-Intensive Goods

Goods that require a high amount of capital to produce, like machinery.

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Study Notes

Course Information

  • Course Title: International Business and Trade
  • Course Module
  • Compiled By: Mary Rose T. Aragon, DBA
  • University of Rizal System, Province of Rizal

Lesson 1: Understanding the Fundamentals of International Business and Trade

  • International business is central to the global economy as nations become interconnected.
  • Understanding international business and trade is essential for professionals in fields like accountancy, finance, and business management.
  • International business encompasses any commercial transaction between two or more countries, involving trade (exchange of goods/services), investment (capital flow), and multinational enterprise operations.
  • International trade is a subfield of international business, focusing primarily on the exchange of goods and services.

Lesson 2: Classical and Modern Trade Theories

  • International trade is a complex phenomenon evolving over centuries.
  • Trade theories explain countries' engagement in trade and how it benefits nations and companies.
  • Classical theories, like Absolute Advantage (Adam Smith) and Comparative Advantage (David Ricardo), form the foundation of understanding the rationale behind trade.
  • Modern theories, including Heckscher-Ohlin, New Trade, and Gravity Models, account for more complex global factors (economies of scale, factor endowments).
  • Key concept: Opportunity cost is a key factor in determining comparative advantage.

Lesson 3: International Trade Organization

  • International trade is influenced by international organizations like the World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank.
  • These organizations establish frameworks for cooperation, regulation, and promotion of global economic stability and trade practices.

Lesson 4: Trade Policies

  • Trade policies play a significant role in shaping international trade.
  • Key instruments of trade policy include: tariffs (taxes on imports), quotas (limitations on imports), subsidies (financial support to domestic industries), and export restrictions.
  • Trade policies are shaped by domestic interests, political ideologies, and economic goals.
  • These policies aim to protect domestic industries, manage economic relations with other countries, and ensure national economic security.
  • The debate on trade protectionism vs free trade is a core area.

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IBT Lesson 1-4 Lectures PDF

Description

Explore the key concepts of modern trade theories, including the Heckscher-Ohlin Theory and New Trade Theory. Learn how factor endowments, comparative advantages, and economies of scale influence trade patterns between countries. This quiz will test your understanding of these important economic theories.

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