Econ test 1

motivation for intra industry trade

1.Consumer desire for product variety. 2.Firm desire to take advantage of economies of scale.

Trade and Income Distribution

1.Demand for Capital Rises 2.Demand for Land Rises 3.Demand for Skilled Labor Rises 4.Demand for Unskilled Labor Falls

Entry Modes to Foreign Markets:

1.Exporting 2.Licensing 3.Franchising 4.Joint Ventures 5.Wholly-Owned Subsidiaries

International economic activity differs from domestic economic activity in three fundamental ways:

1.Exports- (selling to foreign buyers) and imports (buying from foreign sellers) of goods and services take place 2.Lending and borrowing can occur in foreign markets 3.Countries use different currencies

Countries richly endowed with labor relative to land

1.Lower relative cost of labor 2.Lower relative cost of labor intensive goods 3.Tendency to export labor intensive goods and import land intensive goods

global organizations

1.World Bank 2.International Monetary Fund 3.World Trade Organization

Countries richly endowed with land relative to labor

2.Lower relative cost of land 3.Lower relative cost of land intensive goods 4.Tendency to export land intensive goods and import labor intensive goods

oligopoly

A Few Firms Dominate a Market1.Internal Scale Economies2.Significant Barriers to EntryUse Game Theory to Analyze Market

Hecksher-Ohlin Theorem (HOT)

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.

Ongoing trade war

-Concerns that steel and aluminum imports threatened national security resulted in tariffs on steel imports of 25 percent and 10 percent on imports of aluminum. -The U.S. began imposing tariffs on Chinese imports to retaliate against what the U.S. claimed were range of unfair trade policies and practices towards U.S. intellectual property. The Chinese government retaliated by placing tariffs on imports from the United States

Trump on trade

-Donald J. Trump, speaking on Tuesday in Monessen, PA., promised to renegotiate international trade deals if elected president.

Clinton

-For months, Trump has slammed U.S. trade deals with Mexico and South Korea as "horrible" and "disastrous." He wants to fix them by placing hefty fines- known as tariffs - on goods coming into the U.S. from foreign countries that don't play fair. -Now Clinton says she's ready to impose tariffs, too. "When countries break the rules, we won't hesitate to impose targeted tariffs," she told the crowds at a manufacturing plant in Warren, Michigan. She said China and other countries have "gamed the system for too long."

chinas exchange rate

-In 1994, the Chinese government switched from a system of several different exchange rates to a fixed rate to the U.S. dollar. •Locked at about 8.28 yuan per dollar from 1997-2005 -By 2003, the U.S. government began to complain that China's fixed-rate policy was unacceptable currency manipulation. •The U.S. threatened large new tariffs on imports from China if the yuan wasn't revalued.

China abundant and scarce resources

Abundant Resource: Unskilled Labor Scarce Resource: Land Demand for Unskilled Labor Rises Demand for Land Falls

brexit

-In 2016, voters in the United Kingdom (UK) voted 52 percent to 48 percent to leave the European Union (EU). -Differences in the vote were geographic: •London, Scotland, and Northern Ireland voted to remain. •The rest of England (outside London) and Wales voted to leave. -Proponents of "stay" stressed economic benefits to the UK of EU membership. -Proponents of "leave" stressed British sovereignty.

US abundant and scarce resources

Abundant Resources: 1.Capital 2.Land 3.Skilled Labor Scarce Resource: 1. Unskilled Labor

four recent developments

-Ongoing trade war -immigration -brexit -Chinas exchange rate

with international trade: Country A - demand for land rises, demand for labor falls Country B - demand for labor rises, demand for land falls

-country A -- Return to Landowners Rises, Wages Fall -country B -- Wages Rise, Return to Landowners Fall

culture, religion, ethics

-culture : -individual vs the group -social mobility -religion --> which religions are more conductive to economic success -ethics

intl trade makes it possible for

-each country to produce a restricted range of models, and for each firm to take advantage of economies of scale. -Consumers in each country want a greater choice among a variety of models. -With international trade, more efficient firms expand as they export and continue to see domestically; less efficient firms exit the industry.

Mercantilism

An economic policy under which nations sought to increase their wealth and power by obtaining large amounts of gold and silver and by selling more goods than they bought -international trade is a zero sum game -->In a zero-sum game, someone can win only if somebody else loses." ... Traders are willing to lose when they obtain external benefits from trading.

Stoper-Samuelson Theorem

As a country liberalizes (removes restrictions) its international trade, its abundant factors tend to gain and its scarce factors tend to lose.

According to the model of external scale economies (also called agglomeration economies) and trade, labor market pooling and knowledge spillovers contribute to cost advantages to firms that locate _________________ each other in a given country, and countries with these locations will be net _________________ of this product. (Examples of this phenomenon include filmmaking, watch-making, and financial services.)

. close to; exporters

automobile example

Before Trade U.S. 6 Firms: Average Price $10,000 Rest of World 8 Firms: Average Price $9,000 With Trade 10 Total Firms Instead of 14 Firms: consumers in all countries can now buy autos from 10 Firms. Average price is lower, say $8,000, since each firm is larger and takes advantage of scale economies.

The country of Butlerovia has an endowment (total supply) of 21 units of labor and 3 units of land, whereas the rest of the world has 140 units of labor and 14 units of land. If wheat is land-intensive and cloth is labor-intensive, what is the Heckscher-Ohlin prediction for the pattern of trade between Butlerovia and the rest of the world?

Butlerovia is land abundant and will export wheat and import cloth.

Labor Marketing Pooling:

Cluster of firms in a particular industry creates a pooled market for workers with highly specialized skills Such a pooled labor market is to the benefit of both firms and workers. Workers are less likely to become unemployed since there are numerous firms in the area in which they live that may be interested in their services. Firms are less likely to suffer from labor shortages, as a ready supply of workers is available locally.

benjamin franklin

"No nation was ever ruined by trade."

Bernie

"Since 2001 we have lost more than 60,000 factories in this country, and more than 4.9 million decent paying manufacturing jobs. We must end our disastrous trade policies."

Immigration

-About 260 million people, 3 percent of the world's population, live outside the country of their birth. -For most industrialized countries (an exception is Japan) the percentage of the country's foreign-born population is high. -Many of the foreign-born are undocumented immigrants—over one-quarter of the total for the U.S. -Immigration policies have been set in place to reduce and restrict immigration.

scale economies

Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs

David Ricardo

English economist who argued that the laws of supply and demand should operate in a free market Trade is mutually beneficial; idea of comparative advantage.

International Trade and External Scale EconomiEs (clustering of firms)

Export opportunities provide an advantage to firms in a given industry clustered in a particular location. Knowledge spillovers and pooling of labor reduce their costs of production.

Globalization of Production

Individual firms are dispersing parts of their production to various locations around the world to take advantage of national differences in costs and quality of inputs.

Knowledge Spillovers:

Knowledge is an important input in highly innovative industries Firms acquire specialized knowledge through their own R & D. Firms also learn by their employees engaging in informal exchange of information and ideas that take place at a personal level. This exchange occurs more easily when an industry is clustered in a particular area, where employees of different companies mix socially & discuss technical issues related to their jobs.

Initially Maytag sells only in U.S. and Samsung sells only in South Korea. Each firm produces 20 refrigerators: 10 bottom-freezers refrigerators and 10 side-by-side freezer refrigerators. 3000 hours in each firm. Let trade occur between the U.S. and South Korea. Suppose Maytag specializes in bottom- freezer refrigerators. Suppose Samsung specializes in side-by-side refrigerators. 3000 hours are employed by each firm

Result Maytag produces 25 bottom-freezer refrigerators Samsung produces 25 side-by-side freezer refrigerators Maytag exports say 12 refrigerators to South Korea Samsung exports say 12 refrigerators to U.S.

Globalization of Markets

Tastes and preferences of consumers are moving to some global norm.

producer surplus

The difference between the price at which producers are willing to sell their good and the price they actually receive

consumer surplus

The difference between what a buyer is willing to pay for a given amount of a good or what he or she pays for that amount of the good.

Adam smith

Trade is mutual beneficial; idea of absolute advantage.

The Federal Reserve Bank of St. Louis (FRED) reports the following. Taking Canadian Dollars to One U.S. Dollar, on July 1, 2020 the exchange rate was 1.3578. On August 28, 2020, the exchange rate was 1.3106. Over this period did the U.S. dollar appreciate or depreciate against the Canadian dollar?

USD depreciated vs against the canadian dollar

1.Two Goods: Beer and Autos 2.Beer requires capital and labor; Autos require capital and labor. 3.But capital is industry specific (immobile); i.e. the vats used to brew beer can't be used to produce autos, & stamping presses used to produce autobodies can't be used to produce beer. Some labor is industry specific: brew masters can't easily become auto production engineers and vice versa. 4. Some labor is mobile between the beer and auto industries; e.g. young marketing and finance professionals can more easily move between industries.

W trade: Production of beer rises and production of autos fall gain: Brewmasters Producers of vats to brew beer Lose: Auto production engineers Producers of stamping presses used to produce autos

monopolistic competition

a market structure in which many companies sell products that are similar but not identical 1.Internal scale economies 2.Product differentiation 3.No significant barriers to entry

Autarky

a situation in which a country does not trade with other countries

Since the late 1970s, China has been a strong __________ of manufactured goods and __________ of land-intensive products such as wheat. The trade pattern is ____________ with what happened in Japan, Korea, Taiwan, and Hong Kong previously.

a. exporter; importer; consistent

Scale economies are said to be present when

an increase in output leads to a decrease in average cost.

external scale economies

based on the size of an entire industry within a specific geographic area Apply to the level of the industry rather than the level of the individual firm. External scale economies explain the concentration (clustering) of firms in an industry in one or few locations.

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

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

Specialization and International trade allows a country to ___________ beyond its production frontier.

consume

Which of the following is true of mercantilism? Mercantilists believed that

d. national well-being was based on national holdings of gold and silver.

If the dollar-pound exchange rate changes from $1.50 per £ to $2 per £, the dollar has _________against the pound (£) and the pound (£) has against _____________the dollar.

depreciated; appreciated

12. Looking at the product cycle, __________countries are more apt to export newer non-standardized products at ____________ stages of the product cycle.

developed; earlier

7. 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

With intra-industry trade

fewer adjustment problems are likely to occur than with inter-industry trade. The reason is that intra-industry trade requires a shift of resources within an industry instead of between industries.

intra industry trade

international trade of goods within the same industry EX: 1.Hondas for Volkswagens 2.French wine for Italian wine 3.Canadian skis for Swiss skis

The effect on young marketing and finance professionals

is ambiguous

exchange rate

is the value of a country's currency in terms of some other country's currency

Comparing inter-industry trade with intra-industry trade, inter-industry trade is____________________________, while intra-industry trade is __________________________.

more consistent with the Heckscher-Ohlin model of international trade; more likely to take place between developed countries

globalization

refers to a shift to a more integrated and interdependent world economy.

According to the gravity model, countries tend to trade more with countries that are _________ in economic size and _________ in geographical area.

similar; nearer

comparative advantage

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

absolute advantage

the ability to produce a good using fewer inputs than another producer -greater output per worker

For the United Kingdom in Quarter Two-2020, exports of goods and services were British pounds 159 billion; imports of goods and services were British pounds 161 billion. Accordingly, the United Kingdom had a

trade deficit of British pounds 2 billion.

resources

•More-Skilled Labor •Less-Skilled Labor •Land •Capital Equipment •Location •Natural Resources •Entrepreneurship

examples of clustering

•Semiconductor industry in California's Silicon Valley •Investment banking industry in New York City •Entertainment industry in Hollywood •Film-making in Bollywood in Mumbai, India •Buttons and zippers produced in Qiaotou, China •Musical wind instruments in Elkhart, Indiana •Sock industry in Yiwu, China •Advertising agencies in New York City •Carpet manufacturers in Dalton, Georgia

challenges that britain and the rest of the EU must resolve

•What will be the status of the border between Northern Ireland (part of the UK) and Ireland? •What tariffs and customs procedures will exist for trade between Britain and the EU? •Will there be new barriers to trade in services? Especially, to what extent can London banks continue to sell financial services to EU firms and residents?