Intro and Commercial Rev
Aggregate social welfare
The overall well-being of society, commonly modeled as the sum (or a social-welfare function over) individuals’ utilities. Policy evaluation often compares changes in this aggregate under alternative allocations.
Mercantilism
A pre-classical doctrine holding that national wealth is enhanced by accumulating specie via trade surpluses, promoting exports and restricting imports through state monopolies and protection.
Lewis hypothesis
A development model in which surplus labor from a low-productivity traditional sector migrates to a modern sector at a fixed real wage until surplus labor is exhausted, after which wages rise and structural transformation proceeds.
Hecksher-Ohlin trade theory
Because comparative advantage comes from factor endowments, countries export goods that intensively use their relatively abundant factors and import goods that intensively use their scarce factors (e.g., a capital-rich country exports capital-intensive goods and imports labor/labor-intensive goods).
Comparative vs. absolute advantage
Absolute advantage: a country can produce a good using fewer inputs than another. Comparative advantage: a country produces a good at lower opportunity cost; gains from trade follow comparative, not absolute, advantage.
Factor Price Equalization
Under H–O assumptions with free trade, identical technologies, and no trade barriers, goods-price equalization implies equalization of factor prices (wages, returns to capital) across countries. How?
Exogenous vs. endogenous factors
Exogenous variables are determined outside a model and taken as given (e.g., technology in basic models). Endogenous variables are determined within the model by agents’ choices and market interactions.
Rents
Returns exceeding the minimum required to keep a factor in its current use (e.g., scarcity rents, monopoly rents). Rent-seeking refers to resources spent to obtain or protect such rents without creating new value.
Domar hypothesis
In agrarian economies, land abundance plus labor scarcity creates incentives for elites to establish coercive labor institutions (e.g., serfdom) to resolve labor supply constraints. Return to enslaving a population rises with the land-labor ratio.
Primary vs. secondary vs. tertiary production
Primary: extraction of raw materials (agriculture, mining). Secondary: manufacturing and processing. Tertiary: services; higher stages typically embody more value added and human capital.
Pax Brittanica
The 1815–1914 period of relatively low great-power conflict and falling trade costs, associated with British hegemony (naval dominance and legal-institutional arrangements) that facilitated global commerce.
Infant-industry protection
Temporary trade protection or subsidies to new sectors to allow learning-by-doing and scale economies; to be efficient, support must be time-bound (for productivity gains to exceed market distortions).
Credible commitment
A government’s or agent’s ability to bind future actions so promises are believed; in economics, supported by institutions (e.g., independent courts) that make policies time-consistent and reduce hold-up risk.
Incumbents vs. new entrants
Incumbents are existing firms with established market positions; entrants are potential or new competitors. Entry conditions determine market structure, innovation, and long-run efficiency.
Tropical and temperate crops
Tropical export staples (e.g., sugar) historically exhibit scale economies and plantation organization; temperate crops (e.g., wheat) are more amenable to smallholder production—differences that shape factor demands and market structure.
Backward vs. forward linkages
Backward linkages: demand an industry creates for its inputs upstream. Forward linkages: cost or quality effects an industry has on downstream users; strong linkages propagate shocks and learning across sectors.
Stolper-Samuelson
Based on HO model, tells us who will support trade. In capital-rich countries, capitalists win and labor loses (high skill workers + capital owners are pro-trade; low skill workers are protectionist). In capital-scarce countries, capitalists prefer protection, labor prefers free trade.
Balance of payments adjustment mechanism
Processes through which a country’s external accounts return to equilibrium after a deficit or surplus.
Endowments
A country’s initial supplies of productive factors (e.g., land, labor, capital, natural resources) that shape comparative advantage and determines what goods they are going to produce.
Terms of trade
The relative price of a country’s exports in units of its imports. An improvement in ToT allows more imports per unit of exports, holding volumes constant.
Economies of scale
Average costs fall as output increases due to fixed-cost spreading, specialization, or network effects; internal to the firm or external to the industry.
Factors of production
Primary inputs—commonly labor, capital, and land—combined by technology to produce goods and services; their remuneration is wages, returns to capital, and rents, respectively.
Corn Laws
British tariffs/restrictions on grain imports (early 19th c.) that protected domestic landowners; repeal in 1846 reduced food prices and shifted income toward industrial interests and consumers.
Diminishing marginal returns
Holding other inputs constant, the marginal product of an input eventually declines as more of that input is used. E.g., a factory employs workers to manufacture its products using machinery. At some point, if the factory is operating at an optimal capacity, hiring additional workers will result in less efficient operations (because you're paying their wages, but you're not actually producing much more).
Distributional effects
The way policies or shocks change the income/wealth of different groups (by factor ownership, sector, or skill), independent of aggregate efficiency.
Public good
A good that is nonrival (one person’s use does not reduce another’s) and nonexcludable (costly to prevent use), e.g., national defense; markets often undersupply the good due to free-riding.
Minimum efficient scale
The smallest output level at which long-run average cost is minimized; a high MES relative to market size supports concentrated market structures.
Externalities
Costs or benefits of an action borne by third parties not priced in the market (negative or positive); lead to inefficiency absent corrective policies (taxes, subsidies, regulation).
Gold Standard
A monetary system fixing a currency’s value to a specified quantity of gold, with free convertibility; constrains monetary policy and links countries via gold flows.
Price specie-flow mechanism
If a country runs a trade surplus, it receives gold from abroad. Money supply rises -> domestic prices rise -> exports become less competitive, imports increase -> the surplus shrinks.
Conversely, a trade deficit leads to an outflow of gold -> prices fall, making exports cheaper and imports more expensive -> the deficit corrects.