International Trade III Key Terms

Definitions of key terms, theories and models.

autarky

a national economy devoid of all international trade

bilateral trade balance

total exports - total imports (X-M)

trade volume

total exports + total imports (X+M)

Ricardian Model

the simplest model of international trade of 2-2-1 dimensions wherein differences in technology/labour productivity create the opportunity for gains of trade based on comparative advantage.

Hecksher-Ohlin Model (H-O model)

A more complex theory of international trade (2-2-2) where relative endowments of 2 production inputs (usually K & L) foresee gains from trade.

the value-added method of calculating GDP

the contribution of each stage of production to the final value of a good, emphasizing the importance of domestic versus foreign inputs.

The autarkic conditions of the ‘no trade model’

1. identical production functions for each country

2. analogous relative endowments in each country

3. constant returns to scale (CRS)

4. homogeneous tastes in both countries

5. no distortionary policies or conditions like taxes, tariffs, subsidies, imperfect competition, etc.

H-O Theorem

Domestic economic production will preference the good that utilises the more abundant input more intensively. Hence:

A country’s exports use its abundant production input more intensively. Conversely, its imports require the intensive use of its more scarce resource.

Stolper-Samuelson Theorem (H-O)

ncreases in the relative price of a good foresee higher returns (real income) for the factor used intensively in its production and lower returns of the other factor.

Rybczynski’s Theorem (H-O)

Any change in a factor endowment precipitates a proportionally greater change in the volume of production for the good requiring said factor intensively, as well as an inverse change in the quantity produced of the good not using this factor intensively.

Factor price equalisation theorem (H-O)

2 countries producing the same 2 goods will eventually face consistent relative input prices.

gains from exchange

gains from trade specifically derived from the attainment of greater overall utility (IC curve) through trade with another actor with a different resource/factor endowment

gains from specialisation

gains of trade derived specifically from the devotion of resources to comparatively advantageous industries, resulting in higher global output compared to pre-trade levels

The specific-factors model (SFM)

trade model determined by the mobility of factors