International Economics Midterm Preparation

absolute advantage

when a country can make more of a good with the same resources

absolute advantaged goods

goods a country makes more efficiently compared to other goods they make

absolute disadvantaged goods

goods a country makes less efficiently compared to other goods

comparative advantage

when a country gives up less to make a good compared to others

comparative advantaged goods

goods a country makes at lower opportunity cost

comparative disadvantaged goods

goods a country makes at higher opportunity cost

labor productivity

output per worker or per hour worked

Ricardian model

trade model based on differences in labor productivity

efficiency of labor

how much a worker can produce

cost of labor

wages or expenses to employ a worker

weakness of the Ricardian model

assumes only one input: labor

superior technologies

better methods or tools to make more with less

factor endowments

a country’s supply of labor, land, and capital

Hecksher-Ohlin model

trade model based on countries having different resources

weakness of the H-O model

assumes identical technology across countries

Stolper-Samuelson theorem

trade helps abundant factors, hurts scarce ones

factor price equalization

trade makes wages and returns on capital more equal

specific factors model

some resources like land or capital can’t move between industries

land-intensive goods

goods that need a lot of land to produce

labor-intensive goods

goods that need a lot of workers to produce

strengths of Ricardian model

simple and clear; shows how productivity differences drive trade

strengths of Hecksher-Ohlin model

the fact that this model includes multiple inputs; explains trade based on resource differences

trade policy

generally, government rules that affect international trade

price-based trade policy

policies that raise or lower prices like tariffs or subsidies

quantity-based trade policy

policies that limit amounts traded like quotas

quality-based trade policy

policies that set standards for product safety or features

tariffs

taxes on imports; make foreign goods more expensive

export subsidies

payments to domestic firms to make exports cheaper

partial equilibrium analysis

studies one market while ignoring others

general equilibrium analysis

studies all markets and their interactions

small market vs large market analysis

small markets don’t affect world prices; large ones can

retaliatory tariffs

tariffs a country imposes in response to another’s tariffs

welfare effect

how trade policy changes total well-being in a country

efficiency effect

how well resources are used before and after a policy

terms of trade effect

how a country’s trade price ratio changes with policy

what happens when a small country imposes a tariff

prices rise, imports fall, but world price stays the same; hurts consumers more than it helps producers

who wins and loses if a small country imposes a tariff

domestic producers and government win; consumers lose, and the country is worse off overall

what happens when a large country imposes a tariff

imports fall, world prices drop; the country might gain if terms of trade improve

who wins and loses if a large country imposes a tariff

producers and government may win; consumers lose, foreign exporters lose; overall effect depends on price shift

factor mobility

how easily capital and labor move across borders

emigration

leaving one’s home country to live elsewhere

immigration

entering a new country to live or work

migration

movement of people across borders, for any reason

effects of migration on host countries

fiscal effect, multiplier effect, diversity effect, brain gain, congestion effect

effects of migration on home countries

remittances, fiscal effect, brain drain, return migration

global impact

migration shifts labor, income, and skills worldwide

migration policies

laws that control who can enter, stay, and work

Foreign Direct Investment (FDI)

when a firm invests directly in another country’s business

global supply chains

production spread across countries to cut costs

Marginal Product of Capital (MPK)

extra output gained from using one more unit of capital

effects of FDI on host countries

brings money, jobs, and new tech; may also outcompete local firms

effects of FDI on home countries

may lose jobs, but gain profits and access to new markets

why do firms engage in FDI

to avoid taxes or tariffs, pay lower wages, or compete in tight markets