Classic Trade Theories
This 1776 book by Adam Smith challenged mercantilism and laid the foundation for modern trade theory.
The Wealth of Nations
The H-O model shifts the focus of trade from labor productivity to these, which include land, labor, and capital.
Factor Endowments
This price-based tool is a tax levied specifically on imported or exported goods.
a Tariff
In a "Small Country" model, a tariff always raises the domestic price by this specific amount.
What is the full amount of the tariff?
True or False: Trade is a "zero-sum game" where one country must lose for another to gain.
False (It is mutually beneficial).
Adam Smith’s theory states a country should export goods where it has lower labor requirements than any other country, known as this.
Absolute Advantage
According to the H-O Theorem, a country with a high labor-to-capital ratio is considered to be this.
Labor-abundant
These government payments to domestic producers are designed to lower production costs and encourage selling abroad.
Export Subsidies
This group is the primary "loser" of trade protection, as they must pay higher prices for goods.
Who are Consumers?
True or False: For a 10% reduction in trade costs, the welfare gain to low-income consumers is more than four times that of the highest-income group.
True. Low-income households benefit more because price reductions provide higher value to those with tighter budgets.
This revolutionary 1817 concept explains why a country should trade even if it is less productive in every single industry than its neighbor.
Comparative Advantage
This theorem suggests that free trade leads to the leveling of wages and returns to capital across different countries.
Factor-Price Equalization
This quantitative limit on trade is "negotiated" between the importing and exporting countries to avoid harsher barriers.
What is a Voluntary Export Restraint (VER)?
This term describes the pure efficiency loss (areas b + d) that occurs because a tariff distorts production and consumption.
What is Deadweight Loss?
True or False: The Multi-Fibre Arrangement (MFA) was a multilateral system of Voluntary Export Restraints (VERs) that covered approximately 50% of the world textile trade
True. It was a significant historical example of VER usage.
In Ricardo's theory, the decision to specialize is based on this "cost"—defined as what you sacrifice to produce one good over another.
Opportunity Cost
If a product like "Cloth" uses more labor per unit of capital than "Wine" does, it is described as having this.
Labor Intensity
Standards, licensing, and other administrative hurdles that restrict trade without using taxes are known by this collective term.
What are Non-Tariff Barriers (NTBs)?
Unlike a tariff, where the government gains revenue, a VER is unique because this "rent" is captured by foreigners.
What is Quota Rent?
In the "Small Country" model, a tariff results in a net national welfare gain because the government revenue collected is always larger than the deadweight loss
False. For a small country, tariffs always reduce national welfare as the deadweight losses represent pure efficiency losses with no offsetting gains.
According to the numerical example provided, if England needs 100 hours for cloth and 120 for wine, its opportunity cost for 1 unit of cloth is this much wine.
0.83 units of wine
The H-O model argues that trade acts as a substitute for this, allowing countries to "import" scarce factors indirectly.
Factor Mobility
Governments often use tariffs to shield these "young" domestic industries that are not yet ready for global competition.
What are Infant Industries?
Open trade is especially helpful for this group, whose welfare gains can be 4× higher than those of high-income groups.
Who are Low-income consumers?
True or False: Empirical evidence shows that developing countries experience average welfare gains of 58% from open trade, which is more than triple the static gains.
True. Historical data consistently supports that open trade policies correlate with these higher growth rates and gains.