Basics of International Trade
What is the difference between international and domestic trade?
International trade involves the exchange of goods and services across national borders, whereas domestic trade occurs within the same country.
What is mercantilism?
A theory that nations should accumulate financial wealth, typically in gold, by encouraging exports and discouraging imports.
Who proposed the theory of absolute advantage?
Answer: Adam Smith.
What is the factor proportions theory?
Answer: It states that countries produce and export goods that require resources that are abundant and import goods requiring scarce resources.
Who developed the international product life cycle theory?
Raymond Vernon
Name one benefit of international trade.
International trade provides a greater choice of goods and services
What is a trade surplus?
When the value of a nation's exports exceeds the value of its imports.
What is the absolute advantage?
Answer: The ability of a nation to produce a good more efficiently than any other nation.
What are the two resource categories in factor proportions theory?
Answer: Labor and land/capital equipment.
What is the first stage of the international product life cycle?
Answer: The new product stage.
How is the economic importance of trade measured for a nation?
By the value of its trading activity relative to its GDP
What are the three essential pillars of mercantilism?
Trade surpluses, government intervention, and colonialism
What is comparative advantage?
Answer: When a nation produces a good more efficiently than it does any other good, even if it's less efficient than other nations.
What is the Leontief Paradox?
It is the finding that U.S. exports require more labour-intensive production than its imports, contradicting the factor proportions theory.
What happens in the maturing product stage?
Answer: The product is widely recognized, and exports rise, leading to possible production in foreign markets.
What are the three primary benefits of international trade?
Greater choice of goods and services, job creation, and improved living standards
What was one major flaw of mercantilism?
Answer: It viewed international trade as a zero-sum game, restricting overall trade if all nations followed this policy.
Riceland can produce 10 units of rice using 1 unit of labor, while Tealand can only produce 6 units of rice with the same labour. However, Tealand is more efficient in producing tea, making 4 units of tea using 1 unit of labour, while Riceland can only produce 1 unit of tea with the same resources. What should Riceland and Tealand do to maximize their production?
Answer: Riceland should specialize in rice production, and Tealand should specialize in tea production. They should then trade to mutually benefit from each other's efficiencies.
According to the factor proportions theory, what type of products would a labour-abundant country specialize in?
Labour-intensive products
What happens in the standardized product stage?
Answer: Competition increases, companies lower prices, and production often shifts to low-cost countries.
What is trade interdependence, and what are its effects?
It refers to the economic reliance between nations; it can benefit nations but can also cause harm if companies withdraw during tough economic times
How did mercantilist nations use their colonies?
Answer: As sources of inexpensive raw materials and markets for higher-priced finished goods.
Country A can produce both cars and computers more efficiently than Country B. However, Country A has an especially large advantage in car production, while Country B can produce computers less inefficiently than it can produce cars. How can these countries benefit from trade, and what trade theory applies?
Answer: Even though Country A has an absolute advantage in both goods, Country B has a comparative advantage in producing computers. Therefore, both countries will benefit if Country A specializes in car production and Country B specializes in computers, then they trade. This is an example of comparative advantage.
What was the main critique of the factor proportions theory?
It assumes production factors, especially labor, are homogeneous, which they are not.
What is one limitation of the international product life cycle theory?
It struggles to explain modern trade patterns because new products emerge globally and simultaneously due to rapid R&D.