Trade Models and Monopolistic Competition

These flashcards cover key concepts from the lecture on trade models, specifically focusing on monopolistic competition and its implications for international trade.

Why do countries import and export the same good despite having comparative advantage?

Monopolistic competition allows differentiated goods to be traded, resulting in both imports and exports.

What assumption in previous models excludes the possibility of simultaneous import and export of the same good?

The assumption of perfectly competitive markets.

What type of market does monopolistic competition represent?

An imperfect competitive market where firms produce differentiated goods.

What are the main features of monopolistic competition?

Many producers, differentiated goods, freedom of entry and exit, and long-run economic profit of zero.

What is the impact of increasing returns to scale in monopolistic competition?

As firms produce more, their average cost decreases, leading to specialization and enhanced trade.

What happens to demand curves in long-run equilibrium under monopolistic competition?

As new firms enter, the demand curve shifts to the left, leading to zero monopoly profits.

What drives the gains from trade in monopolistic competition?

Lower prices and increased variety of goods available to consumers.

What is the intra-industry trade index?

A measure of how much trade in each product involves both imports and exports.

What does the gravity equation model in international trade?

The relationship between trade volume and the GDP of economies and the distance between them.

What are some barriers to free trade mentioned in the gravity model context?

Tariffs, quotas, customs regulations, geographic and cultural factors.

How does the gravity equation imply trade patterns between larger countries?

Larger countries trade more due to higher production of varieties and higher demand.