Econ Test 1

What is meant by the capital abundant nation? What determines the shape of the production frontier of each nation?

A nation can be capital abundant if the ratio of the overall amount of capital to the total amount of labor available is greater that in the other nation. Ex. If labor for Nation 2 exceeds labor for nation 1. The shape of the production frontier is determined by the maximum amount of output possibilities for 2 goods.

What is meant by economies of scale?

A proportionate saving in costs gained by an increased level of production

Industry Classification

Classification is determined by what type of business the company is.

In what way was Ricardo's law of comparative advantage superior to Smith's theory of absolute advantage? How do gains from trade arise with comparative advantage? How can a nation that is less efficient than another nation in the production of all commodities export anything to the second nation?

Comparative advantage is more superior than absolute advantage because comparative advantage allows countries to be more efficient during trading as less opportunity costs are present. Gains from trade take place during comparative advantage as countries specialize in a single product, allowing them to be more efficient; which lowers the opportunity costs. Although one country may have no absolute advantage while trading with another country, they will still have a comparative advantage in one of the products. A single country can't have a comparative advantage in more than one product while trading with another country.

Why is Ricardo's explanation of the law of comparative advantage unacceptable? What acceptable theory can be used to explain the law?

David Ricardo's explanation of the law of comparative advantage was based on the labor theory of value, which is not an acceptable theory of value. The law of comparative advantage can be based off the opportunity cost theory which is acceptable by the theory of value.

What is meant by product differentiation? Why does this result in imperfect competition? How can international trade be based on product differentiation?

1. Product differentiation is the way of distinguishing one product from another. It is similar products being produced by different manufacturers in the same industry 2. Product differentiation results in imperfect competition because, in order for competition to be perfect, each product would have to be perfect substitutes for one another. 3. International trade of differentiated products is known as intra-industry trade. International trade can be based on product differentiation in order to allow producers to exploit economies of scale and allows consumers to benefit from the variety of products that would not exist without international trade.

Globalization

Globalization is the processes in which business begin to operate on an international level, creating an influence in that new region. Some of the advantages of globalization is many believe that it can create economic growth, creating more jobs and even lowering prices due to an increase in competition. A few of the negative aspects of globalization is that while there may be more jobs and more efficient labor, people who are less skilled working lower wage jobs are more likely to lose their job. Another disadvantage is that it can lead to international financial crises. Due to these disadvantages, an antiglobalization movement has began on the premise that globalization is the root of many human and environmental problems and blames it for sacrificing human and environmental well being for corporate profits.

In what ways does the Heckscher-Ohlin theory represent an extension of the trade model presented in the previous chapters? What did classical economists say on these matters?

HO theorem states that each nation specializes in the production and export of the commodity intensive in its relatively abundant and cheap factor and imports the commodity intensive in its relatively scarce and expensive factor. H-O theorem explains comparative advantage rather than assuming it like the classical economists did.

Why is a nation's production possibility frontier the same as its consumption frontier in the absence of trade? How does the nation decide how much of each commodity to consume in the absence of trad

In the absence of trade, a nation can only consume the commodities that it produces. Therefore, a nation's production possibility frontier also represents its consumption frontier when there is no trade.

What is the reason for increasing opportunity costs? Why do the production frontiers of different nations have different shapes?

Increasing opportunity costs arise because resources or factors of production are not homogeneous and are not used in the same fixed proportion or intensity in the production of all commodities. This means that as the nation produces more of a commodity, it must utilize resources that become progressively less efficient or less suited for the production of that commodity. As a result, the nation must give up more and more of the second commodity to release just enough resources to produce each additional unit of the first commodity. The difference in the production frontiers between nations is due to the fact that nations have different endowments of resources and technology.

How can intra-industry trade be measured? What are the shortcomings of such a measure?

Intra-industry trade occurs when a country exports and imports goods in the same industry. You basically measure it by getting the values of imports and exports of a specific industry (X&M) and T=percentage of what is traded. The shortcoming is with the T-value as it depends on how broad we describe the industry. Use T value with caution

What is meant by labor-intensive commodity? Capital Intensive commodity? Capital-Labor ratio?

Labor-intensive commodities are goods or services that rely more heavily on labor than the other factors of production, such as capital. Usually more personalized. ex: Hotels or Small Scale farming Capital-intensive processes are those that require a relatively high level of capital investment compared to the labor cost.

What were the Mercantilists' view on trade? How does their concept of national wealth differ from today's views?

Mercantilists believed that by exporting more goods than importing made a country the clear trade winner. This is considered a zero sum game. There could only be one winner in this case between two countries. They measured a nation solely on how much gold and silver it had from exporting goods. This theory allowed for government to have tight control of economic activity. The government wanted larger armies and to be powerful among other nations.

When is monopolistic competition present?

Monopolistic competition is present when no business has control of the market. There are many producers and consumers, and these consumers usually see differences between these producers' products. Therefore, product differentiation is the key to sales. In monopolistic competition, entering and exiting the market is fairly easy with few barriers to cross.

How can international trade take place according to the technological gap model? What criticisms are leveled against this model? What does the product cycle model postulate? What are the various stages in a product life cycle?

Step 1: The technological gap model of international tade explains the role played by inventions and innovations in the world trade. The theory describes monopoly power enjoyed by the country that introduces new goods in a market until other countries learn to produce these goods at a cheaper rate. Thus, international trade is created between the time gap required to inventing a new product and imitating that product. An important criticism leveled against this model is that it fails to explain the size of the technological gaps, the reasons for the technological gaps and ignores to explain how to mitigate the gaps Step 2: The product cycle model postulates that in the early phase of the cycle all parts and labor associated with the product come from the nation in which it was invented. after the product is worldly accepted, production gradually moves from the origin to an imitating nation where it can be produced cheaper. This may lead to foreign direct investments from inventing nation to imitating nation. According to the product cycle model, a product goes through five stages: product introduction, expansion of product for export, product standardization and its production abroad by imitation, foreign imitators underselling the nation in a third market and foreigners underselling the innovative firms in their home market as well.

What does an improvement of a nation's terms of trade mean? What effect does this have on the nation's welfare?

Terms of trade are defined as the ratio of the price of its exports commodity to the price of its import commodity. An improvement in a nation's terms of trade usually regarded as beneficial to the nation in the sense that the process that the nation receives for its exports rise relative to the prices that it pays for in imports.

What is the basis for and the pattern of trade according to Adam Smith?

The basis of Adam Smith's assumption of trade is trade is mutual beneficial; idea of absolute advantage. A country will have the absolute advantage in producing a product when it can produce more of that good than another country with the same amount of resources. The theory is that countries should concentrate on which product they have the absolute advantage in, and trade for what they need.

International Trade

The effect this has on international trade is the environmental standards. The environmental standards are the pollutants each area may face.

Indicate how increase pirating or production and sale of counterfeit American goods without paying royalties by foreign producers might affect the product cycle in the United States.

The increased pirating or production and sale of counterfeit American goods without paying royalties by foreign producers shorten the U.S. product cycle or the time in which the firm can cash in on the new technology or product they brought to market.

What do the terms of trade measure? What is the relationship between the terms of trade in a world of two trading nations? How are the terms of trade measured in a world of more than two traded commodities

The terms of trade measure the ratio of export price to import price. In a world of two trading nations, the terms of trade of the latter are equal to the inverse or reciprocal of the terms of trade of the former. In a world of more than two traded commodities the terms of trade are measured by the ratio of the price index of its exports to the price index of its imports.

How can the supply curve of exports and the demand curve of imports of a commodity be derived from the total demand and supply curves of a commodity in the two nations?

The total demand and supply curve determines both the supply curve of the exports and the demand curve of imports. When the supply of the commodity is above equilibrium, it will export its excess, which derives the supply curve. The same effect happens with the demand curve being derived from imports, when the demand is less than the supply it will import to meet the need

How can we get a rough measure of the interdependence of each nation with the rest of the world? What does the gravity model postulate?

To quickly get an idea of economic interdependence is to look at the ratio of their imports and exports as a percentage of their GDP (imports + exports/GDP x 100%) This looks past the pure number of goods traded, but the amount that traded goods makeup of the total economy. Countries with a higher ratio are more active in international trade and therefore more interdependent. By definition, the gravity model states that "bilateral trade between two countries is proportional, or at least positively related, to the product of the two countries GDP and to be smaller the greater the distance between the two countries." Basically, the larger countries are, and the closer they are, we expect them to trade with each other more.

Footloose industries

are those producing goods that face neither substantial weight gains nor losses during the production process.

Market-oriented industries

are those that locate near the markets for the products of the industry.

Resource-oriented industries

are those that tend to locate near the source of the raw materials used by the industry.

Autarky

economic self sufficiencey

Absolute advantage

greater output per worker

Mercantilists

international trade is a "zero-sum" game

comparative advantage

lower oppertunity cost (80/40=2)

a rough measure of the degree of econonomic interdependence of a nation is given by

the percentage of a nations imports and exports to its GDP

Adam Smith

trade is mutually beneficial; idea of absolute advantage

David Ricardo

trade is mutually beneficial; idea of comparative advantage

Inter-Industry trade

trade of products that belong to different industries.

Intra-trade

trade of products that belong to the same industry.

International economic theory

usually assumes a two-nation, two-commodity, and two-factor world. It also generally assumes no trade restrictions to begin with, perfect mobility of factors within the nations but no international mobility, perfect competition in all commodity and factor markets, and no transportation costs.