General: International Trade

What is the core idea behind gains from trade?

Trade allows countries to specialize based on comparative advantage, raising overall welfare.

What determines the pattern of trade in the Ricardian model?

Comparative advantage: countries export goods with the lowest relative opportunity cost.

Can a country with absolute disadvantage in all goods still gain from trade?

Yes, if it has comparative advantage in at least one good.

How are wages determined in the Ricardian model?

By absolute productivity differences; more productive countries have higher wages.

What is the main assumption of the Specific Factors model?

Each sector uses a specific factor plus mobile labor.

Who gains and who loses from trade in the Specific Factors model?

Specific factor owners in export sectors gain; those in import sectors lose.

How does trade affect the PPF in the SF model?

Trade moves production toward the good with a higher world price, reallocating labor.

What causes labor migration in the SF model with migration?

Wage differences between countries; labor moves until real wages equalize.

In the HO model, what do countries export?

Goods that use their abundant factor intensively.

What is the Stolper-Samuelson Theorem?

An increase in the price of a good raises the real return to its intensive factor.

What is the Rybczynski Theorem?

An increase in a factor increases output of the good that uses that factor intensively.

Who supports free trade in the HO model?

Owners of the abundant factor; they gain from trade.

Why can trade liberalization raise inequality?

It shifts returns toward abundant factors, which may increase wage gaps.

What is the gravity equation of trade?

Trade is proportional to GDPs and inversely to distance.

What are multilateral resistance terms in gravity models?

Barriers to trade relative to all countries, not just one partner.

Why is PPML preferred for estimating gravity models?

It handles zero trade flows and avoids bias from heteroskedasticity.

What are iceberg trade costs?

A fraction of the good "melts away" during transport; only part arrives at destination.

What does the Melitz model add to trade theory?

Firms differ in productivity; only the most productive export.

What are the key predictions of the Melitz model?

Trade reallocates resources toward more productive firms and increases average productivity.

What is an optimal tariff for a large country?

A tariff that improves the country’s terms of trade enough to offset efficiency losses.

What is the welfare formula for large country tariffs?

ΔW = –B – D + J; deadweight losses B & D, terms-of-trade gain J.

Who gains and loses from a tariff in a large country?

Producers and government gain; consumers lose; net effect depends on terms-of-trade gain.

How does trade affect the location of production in the D-S-F (1977) continuum model?

Each country specializes in a range of goods based on unit labor costs and relative wages.

What happens when preferences shift toward goods a country does not produce?

It reduces relative wages and shifts production toward those goods.

What do empirical tests of the Ricardian model show?

Productivity differences explain trade patterns, even when accounting for wages.

What is the Balassa index of Revealed Comparative Advantage?

(RCA) = (export share of a good by country)/(world export share of the good).

Why does home bias in consumption imply trade frictions?

People consume more domestic goods than expected without barriers.

How does the Costinot-Donaldson-Komujer method improve RCA measures?

It incorporates productivity and trade costs from structural models.

What are the welfare gains from trade according to Arkolakis et al.?

They depend on trade elasticity and domestic expenditure share.

How does increased trade reduce self-trade shares in data?

As trade costs fall, countries consume more imports relative to domestic goods.

What is a terms-of-trade deterioration?

A fall in the export price relative to imports; worsens welfare despite trade.