IB/EC 433 Exam 1

Stopler-Samuelson Theorem

As a country liberalizes its international trade, its abundant factors tend to gain and its scarce factors tend to lose

Entry Modes Into Foreign Markets

1. Exporting 2. Licensing 3. Franchising 4. Joint-ventures 5. Wholly-owned subsidiaries

International economic activity differs from domestic activity in 4 ways:

1. Exports and imports of goods and services 2. Lending and borrowing across foreign markets 3. People moving across countries 4. Countries using different currencies

Specialization and international trade allow a country to _____________________ beyond its production frontier.

Consume

Heckscher-Ohlin Model:

- A country will tend to export those goods that use intensively its abundant resources: it will tend to import those goods that use intensively its scarce resources. - Countries with a lot of land will export land-intensive goods and import labor-intensive goods. - Countries with a lot of labor will export labor-intensive goods and import land-intensive goods.

Absolute Advantage

- Greater output per worker

Mercantalists

- International trade is a zero-sum game - One country gains and one country loses - will gain with a trade surplus (exports exceed imports) - lose with a trade deficit (imports exceed exports) - discourage imports and push exports

The ongoing trade war

- The US imposing tariffs on China, and China responded by doing the same

Globalization

- The convergence of markets worldwide. - Nations are the unit of analysis

Four Recent Developments

- The ongoing trade war - Immigration - Brexit - China's Exchange Rate

China's Exchange Rate

- The value of a country's currency in terms of some other country's currency - China has a fixed-rate system and the US does not like that

Immigration

- There are many immigrants worldwide - New policies have been put in place to restrict them

price elasticity of demand

- a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. - Quantity falls when price increases and vice versa.

Comparative advantage

- the ability to produce a good at a lower opportunity cost than another producer

Adam Smith

- trade is mutually beneficial - Idea of absolute advantage - imports are valuable because national consumption can increase

David Ricardo

- trade is mutually beneficial - Idea of comparative advantage

Assume that a country produces two goods, food and clothing, and that the country's production possibility curve is bowed out, i.e., concave to origin. As the country produces more food the opportunity cost of food in terms of forgone clothing

Increases

Production Possibility Curve

Shows all combinations of amounts of different products that an economy can produce with full employment of its resources and maximum feasible productivity of these resources.

Brexit

The British Exit from the European Union - (stay) economic benefits - (leave) - British sovereignty

Producer Surplus

The difference in what the seller is willing to sell the product and what the seller actually receives

How does increasing marginal cost affect the PPC?

With increasing marginal costs, the PPC becomes more and more bowed out

Mercantilists believed that

a country's economic wealth could be measured by the amount of gold and silver in its treasury

After doing his test, Leontief discovered that the U.S. was ____________ labor-intensive goods and ______________ capital-intensive goods. After this realization, Leontief concluded that there are different kinds of labor, natural resources, and capital, which is why his results were ______________ the original Heckscher-Ohlin model.

exporting; importing; different from

Labor-abundant

if it has a higher ratio of labor to other factors of production than does the rest of the world

Labor-intensive

if labor costs are a greater share of its value than they are of the value of other products

Trade allows consumption

outside of the country's production possibilities curve.

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

A rough measure of the degree of economic interdependence of a nation is given by:

the percentage of a nation's imports and exports to its GDP.

In land intensive countries:

wages will fall

In labor intensive countries:

wages will rise