Definitioner IntEk

  1. Absolute advantage
    The country with an absolute advantage produces the good more efficiently than the other country. aLC<a*LC
  2. Biased Growth
    Growth which is not evenly distributed over all manufacturing sectors. Biased growth takes place when the PPF shifts out more in one direction than in the other. Growth may be biased for two reasons; 1. Technological progress in one sector of the economy will expand the economy's production possibilities  2. The increase of the supply of a factor of production will produce growth biased to the production which uses that factor intensively. Export-biased growth disproportionately expands a country’s production possibilities in the direction of the good it exports - Worsens a growing country’s terms of trade, to the benefit of the rest of the world. Import-biased growth disproportionately expands a country’s production possibilities in the direction of the good it imports.
  3. Comparative advantage
    The country with the comparative advantage in the production of a good has a lower opportunity cost of producing that good compared to the other country. aLC/aLW < a*Lc/a*LW
  4. Consumer Surplus
    Consumer surplus measures the amount a consumer gains from a purchase by the difference between the price the consumer actually pays and the price the consumer would have been willing to pay. Graphically, consumer surplus is equal to the area under the demand curve and above the price.
  5. Consumption possibility frontier
    The maximum amount of consumption of a good a country can obtain for any given amount of the other good.
  6. Dumping
    A pricing strategy in which a firm charges lower prices for exported goods than for the same goods sold on the domestic market. Two conditions are required for dumping to occur: 1. The industry must be imperfectly competitive, so that firms set prices rather than taking market prices as given. 2. Markets must be segmented, so that domestic residents cannot easily purchase goods intended for export. It could be profitable for example for a monopolist facing different demand curves at home and abroad.
  7. Economies of scale (increasing returns to scale)
    Doubling the inputs used in an industry more than doubles the industry’s production. Production is more efficient the larger at which it takes place.
  8. Export subsidy
    A payment to a firm or individual that ships a good abroad
  9. Export supply curve
    Shows the quantity of exports a country would choose to provide the rest of the world at each possible price
  10. External economies of scale
    Occur if the firm’s average costs depend upon the size of the industry, but an expansion of the firm’s scale with the industry size held fixed, has no effect on the firm’s average costs.
  11. Factor abundance
    If a country has relatively more of one resource than the other, that country is said to be abundant in that resource. (Labor-abundant, land- abundant)
  12. Factor intensity
    If the production of a good uses relatively more of one factor than the other, the production is said to be intensive in that factor (Landintensive, Labor- intensive etc.)
  13. Factor Price Equalization
    (In the Heckscher-Ohlin model) So long as both countries continue to produce both goods, free trade in goods will equalize relative factor prices through the equalization of relative good prices. When two countries trade goods, they are indirectly trading factors of production. One country will indirectly export labor by exporting a labor intensive good. Another will indirectly export land by exporting a land intensive good. The equalization of market prices for the traded goods also affects the prices of the inputs required to produce these goods
  14. Heckscher-Ohlin Theorem
    Assumptions of the HeckscherOhlin Model: Consider an economy that can produce two goods: cloth and food, Production of these goods require two inputs that are in fixed supply: Labor (L) and Land (T), Both factors of production are perfectly mobile across industries, There are constant returns to scale in production for both goods. Perfect competition prevails in all markets. In the Heckscher-Ohlin model, trade is completely driven by international differences in resources. A country will export that good which uses intensively its abundant factor and import that good which uses intensively its scarce factor. Assume that; cloth is labor intensive, food is land intensive. Home is land abundant and foreign is labor abundant. Then home will export food which intensively uses land of which home is abundant. Home will import cloth.
  15. Immiserizing growth
    The theoretical situation that economic growth could make a country worse off than before the growth due to the growth being export-biased.
  16. Import demand curve
    Shows the quantity of imports a country would choose to buy for each possible price of the imported good.
  17. Import Quota Rents
    An import quota is a direct restriction on the quantity of some good that may be imported. The restriction is usually enforced by issuing licenses to some group of individuals or firms, in some cases the right to sell is given directly to the government of exporting countries. The quota rent is the revenue the license holder will receive from holding the license. (Either by importing the good and selling it more expensively in the import market or by selling the right to import to a third party)
  18. Import quotas
    A direct restriction on the quantity of some good that may be imported.
  19. Import-Substituting Industrialization
    Is a trade and economic policy that advocates replacing foreign imports with domestic production, this is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. For about 30 years after WWII, policies in many developing countries were strongly influenced by the belief that the key to economic development was creation of a strong manufacturing sector and the best way to create that manufacturing sector was by protecting domestic manufacturers from international competition.
  20. Internal economies of scale
    Occur if the firm’s average costs decline with an increase in the firm’s size.
  21. Intertemporal Trade
    Borrowing and lending between countries can be interpreted as a kind of international trade called intertemporal trade. When home today produces more than it consumes it can export consumption today and in exchange import consumption in the future. Foreign will then consume more than it produces today and import consumption today and export future consumption.
  22. Inter-industry trade
    The exchange of one kind of good for another kind of good.
  23. Interindustry Trade
    Inter-industry trade reflects comparative advantage. The pattern of inter-industry trade is that a country export that good which uses its abundant factor.
  24. Intra-industry trade
    Countries both export and imports the same type of good.
  25. Intra-industry Trade (Tariff)
    Intra-industry trade refers to the exchange of similar products belonging to the same industry. The term is usually applied to international trade, where the same types of goods or services are both imported and exported. Examples of this kind of trade include automobiles, foodstuffs and beverages, computers and minerals. Intra-industry-trade does not reflect comparative advantage. Even if the countries had the same overall capital-labor ratio, the firms would continue to produce differentiated products and the demand of consumers for products made abroad would continue to generate intraindustry trade. It is economies of scale that keep each country from producing the full range of products for itself; thus economies of scale can be an independent source of international trade
  26. Isocost lines
    Shows different inputs/outputs that cost the same/has the same value
  27. Leontief Paradox
    According to the Heckscher-Ohlin model a country with a relatively high capital-labor ratio would be an exporter of capital-intensive goods and an importer of laborintensive goods. Using data from 1947, Leontief (1953) found that this was not the case: US exports were less capital-intensive than US imports -> The Leontief paradox. Problems with Leontief’s finding: only uses US data, has data on trade, technology but not factor supplies: Leontief just assumes that US is capital-abundant, makes no distinction between highskilled and low-skilled labor, does not allow for natural resources (land, oil reserves, etc.) as factors of production
  28. Optimum tariff
    The optimum tariff is the tariff rate that maximizes national welfare. The optimum tariff rate for a large country is always positive but less than the prohibitive rate that would eliminate all imports. For a large country, a tariff lowers the price of imports and generates a terms of trade benefit. This benefit must be compared to the costs of the tariff (production and consumption distortions) to find the greatest welfare benefit. The optimum tariff rate for a small country is zero because it cannot affect its terms of trade.
  29. Preferential trading agreements
    Agreement under which the tariffs some nations apply to each other’s products are lower than the rates on the same goods coming from other countries. It is against GATT rules for country A to have lower tariffs on imports from country B than on those from country C. But it is acceptable if countries B and C agree to have zero tariffs on each other’ products. The GATT forbids ”preferential trading agreements” in general, but allows them if they lead to free trade between the agreeing countries
  30. Producer Surplus
    Measures the amount a producer (or firm) gains from a sale by the difference between the price the firm actually receives and the lowest price at which the firm would have been willing to sell. Graphically, producer surplus is equal to the area above the supply curve and below the price.
  31. Production possibility frontier
    The maximum amount of production of a good a country can produce for any given amount of the other good.
  32. Rybczynski Theorem
    For any given good prices (Pc/Pf  fixed) and given that both goods continue to be produced, if the economy's supply of a factor of production increases, then the output of the good that uses this factor intensively increases and the output of the other good decreases. Example: A country which produces cloth and food, cloth being labor intensive and food being land intensive, gets an increased supply of labor.  If the relative price of cloth in terms of food remains fixed this will lead to an increase in the output of cloth and a decrease in the output of food.
  33. Smoot-Hawley Act
    A remarkably irresponsible tariff law passed by the U.S. in 1930. Under this act, tariffs rose steeply and U.S. trade fell sharply; some economists argue that the SmootHawley Act helped deepen the Great Depression. Within a few years after the act's passage, the U.S. administration concluded that the tariffs needed to be reduced. To reduce the tariffs the U.S. approached exporters for negotiations. Such bilateral negotiations helped reduce the average duty on U.S. imports from 59% in 1932 to 25% shortly after WWII.
  34. Stolper Samuelson Theorem
    (In the Heckscher-Ohlin model) If both goods continue to be produced, an increase in the relative price of the labor intense good will increase the wage rate relative to both good prices and reduce the rental rate relative to both good prices. In an economy which produces food and cloth, where food production is land intensive and cloth is labor intensive, an increase in cloth prices will lead to an increase of the wage rate for both clothworkers as well as food-workers. The cost of land will also go down in cloth-production as well as food-production. Making workers in both sectors better off and landowners in both sectors worse off.
  35. Strategic Trade Policy
    Strategic trade policy is defined as trade policy that conditions or alters a strategic relationship between firms, implying that strategic trade policy focuses primarily on trade policy in the presence of oligopoly. This argument locates the market failure that justifies government intervention in the lack of perfect competition. In imperfectly competitive global markets firms earn excess returns. There is international competition over these profits. A government can alter the rules of the game to shift these excess returns from foreign to domestic firms
  36. Summary of the case for free trade
    1. The conventionally measured costs of deviating from free trade are large. 2. There are other benefits from free trade that add to the costs of protectionist policies. 3. Any attempt to pursue sophisticated deviations from free trade is likely to be subverted by the political process
  37. Terms of trade
    Terms of trade (TOT) refers to the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods.
  38. The domestic market failure agreement against free trade
    standard cost-benefit analysis does not properly measure social costs and benefits if: labor used in a sector would otherwise be unemployed etc..
  39. The Heckscher-Ohlin-Vanek Theorem
    Looking at the factor content of trade, each country exports those factors for which the factor share exceeds the income share, and imports those factors for which it is less.
  40. The Infant Industry Argument
    Developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries in developing countries cannot initially compete with well- established manufacturing in developed countries. To allow manufacturing to get a toehold, governments should temporarily support new industries, until they have grown strong enough to meet international competition
  41. The political argument for free trade
    Trade policies in practice are dominated by specialist-interest politics rather than consideration of national costs and benefits. Any government agency attempting to pursue a sophisticated program of intervention in trade would probably be captured by interest groups and converted into a device for politically influential sectors.
  42. Trade Diversion versus Trade Creation
    Two different possible outcomes from creating a customs union. Trade Creation, which is the desirable outcome, is when creation of a customs union leads to replacement of high-cost domestic production by low-cost imports from other members. Trade Diversion, which is undesirable, is the replacement of low-cost imports from nonmembers with higher-cost imports from member nations
  43. Voluntary Export Restraint (VER)
    A VER is an export quota administered by the exporting country. VERs are usually imposed at the request of the importer and are agreed to by the exporter to forestall other trade restrictions
  44. Wage-rental ratio
    Wage rate per hour of labor/rental rate on one acre of land
Card Set
Definitioner IntEk