Trade Theory
What is the key idea of comparative advantage?
Countries gain by specializing in what they produce at the lowest opportunity cost.
Define opportunity cost.
What you give up to get something else.
What’s one main reason Why Nations Fail argues some countries stay poor?
They have extractive institutions that concentrate power and prevent most people from benefiting from growth.
According to Poor Economics, why might poor households avoid saving even when they know it’s beneficial?
Because immediate needs or temptations make it hard to delay consumption — short-term survival often wins over long-term planning.
Define globalization.
The growing interconnection of economies through trade, finance, and ideas.
Country A produces 10 cars or 50 tons of wheat. Country B produces 8 cars or 24 tons of wheat.
Which country has a comparative advantage in producing cars, and why?
Country B — it gives up only 3 tons of wheat per car, while Country A gives up 5. Lower opportunity cost = comparative advantage.
If a worker can produce either 20 shirts or 10 pairs of shoes, what is the opportunity cost of producing one pair of shoes?
2 Shirts.
What makes an institution “inclusive?"
It distributes power widely and protects property rights.
What does “time discounting” mean?
People prefer smaller rewards now over larger ones later.
How did globalization change production for U.S. companies after 1980?
Many firms began outsourcing or offshoring production to countries with lower labor costs, reducing prices but shifting jobs overseas.
What kind of trade do we often see between countries with similar levels of income, technology, and resources?
Intra-industry trade — where countries both export and import similar but differentiated products (like cars or electronics).
If a country’s exports increase from $100 million to $130 million, what is the percentage increase?
30%
What is an example of an extractive institution?
A dictatorship or system where elites control resources for personal gain.
In behavioral terms, what is “present bias”?
It’s the tendency to choose smaller rewards now instead of larger rewards later — overvaluing the present compared to the future.
How has globalization benefited American consumers?
Lower prices and more product variety.
If a tariff raises the price of imported steel, who benefits and who loses inside the country?
Domestic steel producers benefit from higher prices, but consumers and industries that use steel lose because they pay more.
You can earn $100 now or $120 in one year. If you choose $100 now, what does that say about your time preference?
You have a high time preference (or high discount rate) — you value present rewards much more than future ones.
What historical event helped England develop inclusive institutions?
The Glorious Revolution (1688).
Why might the poor reject profitable investments?
They fear losses or need cash now — not later.
What is one cost of globalization for U.S. workers?
Job losses or wage pressure in manufacturing.
According to Krugman’s New Trade Theory, why do similar countries trade with each other?
Economies of scale and consumer preference for variety.
A country can produce 300 shirts or 150 pairs of shoes.
If it decides to make one additional pair of shoes, how many shirts must it give up?
2 shirts.
What does “path dependence” mean in economics?
Past institutional choices shape what’s possible in the present and future.
According to Banerjee and Duflo, what’s the best way to fight poverty?
Test small, local solutions instead of using one big global theory.
According to Krugman, why does globalization sometimes increase inequality?
Because gains are uneven — skilled workers and capital owners benefit most.