IPE Theory
What is intra-industry trade and how does it challenge the comparative advantage theory?
Intra-industry trade refers to the exchange of similar products belonging to the same industry between countries. Unlike inter-industry trade, which involves the exchange of different goods, intra-industry trade occurs when countries both import and export products within the same category.
Comparative advantage theory is based on the idea that countries will specialize in producing goods in which they have a lower opportunity cost. This often implies a focus on homogeneous goods. Intra-industry trade, however, involves differentiated products, where countries both import and export similar items, suggesting that specialization may not be as clear-cut as the theory suggests.
Extra Info: Intra-industry trade highlights the importance of consumer preferences for variety. While comparative advantage theory assumes that trade is driven primarily by cost differences, intra-industry trade illustrates that consumers often value having access to a range of similar products, leading to trade that doesn’t strictly adhere to cost-based advantages.
Define economies of scale and economies of experience.
Economies of Scale: Arise when the unit cost of producing falls as the number of units produced rises — Firms can produce efficiently and begin to export once they produce enough output
Economies of Experience: Arise when efficient production requires specif ic skills that can only be acquired through production in the industry — “seasoned managers, skilled workers, and reliable suppliers of equipment and materials”
Extra info: While both economies of scale and economies of experience contribute to a firm's efficiency and competitiveness, they arise from different mechanisms.
EoS - As production scales up, fixed costs (such as machinery, buildings, and administrative expenses) are spread over a larger number of units. This dilution of fixed costs leads to lower average costs. Variable costs may also decrease due to bulk purchasing of materials.
EoE - As firms produce more, they learn how to improve processes, reduce waste, enhance quality, and optimize operations. This learning can result in faster production times and lower error rates. It often involves developing a skilled workforce, effective management practices, and reliable supplier relationships that become more efficient with experience.
Define absolute advantage and comparative advantage, highlighting the differences. Be sure to mention the concept of "opportunity cost"!
Absolute advantage is the ability to produce more of a good or service than competitors while comparative advantage is the ability to produce a good or service at a lower opportunity cost than competitors.
Which economic theory, dominant from the 16th to the 18th century, argued that a country’s wealth was measured by its stock of gold and silver, leading to protectionist policies that aimed to maximize exports and minimize imports?
Mercantilism
What is the role/view of the state in each of the following three theories: Marxism, Liberalism, Mercantilism?
Marxism - The state is an instrument of the capitalist class that uses state power to sustain the capitalist system
Liberalism - Establishes and enforces property rights to facilitate market-based exchange, but should mostly stay out (i.e., laissez-faire)
Mercantilism - The state should intervene in the economy to allocate resources (economic activity is too important to allow decisions about resource allocation to be made through an uncoordinated process such as the market), since economic strength is a critical component of national power.
What is the definition of export-oriented and import-competing sectors, and which economic model do they relate to: the factor model or the sector model?
Export-oriented sectors are defined as industries that rely intensively on a country’s abundant factor (i.e., the country’s comparatively advantaged industries). In contrast, import-competing sectors are those that depend on society’s scarce factor (i.e., the country’s comparatively disadvantaged industries).
These definitions relate to the sector model of trade (because the conflict line lies between sectors BUT between factors)!
What is an oligopoly and how does this concept relate to first-move advantage and subsidy wars?
Oligopoly is a structure characterized by competition between only a few firms.
In an oligopolistic market, being the first mover can allow a firm to establish significant market share before competitors enter. This is particularly important in markets where economies of scale can lead to cost advantages, making it harder for later entrants to compete.
When one firm in an oligopoly receives a subsidy, competing firms may lobby for similar government support, leading to a "subsidy war." This situation can escalate as firms seek to outdo each other through increasing government assistance, which can distort competition and lead to inefficiencies in the market.
What is the most traded commodity in the world, with significant impacts on global economies, politics, and environmental policies?
Crude Oil
What is the Hecksher-Ohlin (or H-O) model? What does it argue?
It argues that comparative advantage arises from differences in factor endowments. Because countries have different factor endowments and face different factor prices, countries will hold a comparative advantage in different goods. A country will have a comparative advantage in goods produced using a lot of their abundant factor and a comparative disadvantage in goods produced using a lot of their scarce factor.
Extra Info: Countries possess factors of production (labor, capital) in different amounts. Some countries, like the United States, have a lot of capital but relatively little labor. Other countries, such as China, have a lot of labor but relatively little capital. These different factor endowments in turn shape the cost of production. A country’s abundant factor will be cheaper to employ than its scarce factor.
What is the infant-industry argument for protection, and how does it justify government intervention?
The infant-industry case for protection argues that there are cases in which newly created firms will not be efficient initially but could be efficient in the long run if they are given time to mature. Consequently, a short period of tariff protection will enable these industries to become efficient and begin to export. Once this point has been reached, the tariff can be removed. The long-run welfare gains created by the now-established industry will be greater than the short-run losses of social welfare imposed by the tariff.
What is Most-Favored Nation (MFN) and which organization operates under this rule? And what does it seek to prevent?
The central principle upon which the World Trade Organization (WTO) is based, this rule requires that any advantage extended by one WTO member government to another also be extended to all other WTO members. The principle therefore prevents trade measures that discriminate between countries.
What percentage of global trade is now conducted within global value chains (i.e., products made in multiple countries, complicating traditional notions of trade balances)?
A. 25% B. 35% C. 55% D. 70% E. 85%
D. 70%
What is strategic trade theory? Give an example of an industry to which the theory can apply.
Strategic trade theory asserts that government intervention can help domestic firms achieve economies of scale and experience to become efficient and competitive in global markets. In contrast to the classical infant-industry argument, which assumes that markets are perfectly competitive, strategic trade theory asserts that many high-tech industries are characterized by oligopolistic competition.
Airplane production
According to Lobo and Brutger (2024), how do Black Americans and white Americans differ in their perceptions of fairness concerning trade agreements?
Black Americans perceive fairness through a "principled fairness" lens, emphasizing relative equality in trade agreements and supporting those that are equitable for both parties. In contrast, white Americans tend to view fairness through an "asymmetric fairness" lens, showing greater concern for relative gains and losses.
What is GSP (i.e., describe/define AND expand the acronym) and what rule/principle is this an exception to?
Generalized System of Preferences (GSP) allows the advanced industrialized countries to apply lower tariffs to imports from developing countries than they apply to the same goods coming from other advanced industrialized countries. These exceptions aside, MFN ensures that all countries trade on equal terms.
Part of the General Agreement on Tariffs and Trade (GATT) concluded in the late 1960s, and it is a legal exception to the GATT principle of non-discrimination.
Which country is the largest exporter of goods in the world as of 2021?
China
According to the new new trade theory (NNTT), why do only the most productive firms trade internationally? Also, how can smaller domestic firms still survive domestically despite a huge, productive firm (e.g., Apple) offering extremely competitive and cheap products domestically?
International trade often involves significant fixed costs (e.g., logistics, regulatory compliance, marketing, tariffs, quotas). Only the most productive firms can bear these costs and still maintain profitability (because their products are sold very cheap given their productivity once they enter the foreign market --> high demand abroad) when entering foreign markets. Less productive firms may not have the resources or scale to manage these costs effectively.
And the smaller firms can still survive domestically because of several factors, including but not limited to consumers' love of variety, brand loyalty, affinity toward small businesses, etc. (but they can also die out)!
How does Guisinger's argument in her 2017 book differ from the existing argument regarding the support for trade protections among women and racial minorities?
Guisinger's argument posits that higher support for trade protections among women and racial minorities is a rational response to concerns about employment volatility associated with trade liberalization. This contrasts with the existing argument, which suggests that such support stems from a lack of knowledge about economic issues and, therefore, is not a rational response to trade liberalization.
What is the free-riding problem, and how does hegemonic stability theory describe the role of a hegemon in addressing this issue within international trade?
The free-riding problem occurs when individuals or entities benefit from a public good without contributing to its cost, leading to under-provision of that good. Hegemonic stability theory explains that a hegemon, being a dominant country with significant economic and technological resources, can overcome this issue by willingly bearing the full costs of creating and maintaining international trade rules. The hegemon's substantial gains from trade incentivize it to provide these public goods, facilitating the establishment of stable trade regimes. As the hegemon's power diminishes, its willingness to uphold these rules decreases, which can result in a less open global trade environment.
Which two countries were involved in the famous "Opium Wars" in the mid-19th century that were partly about trade imbalances?
Britain and China