ECON 6280: International Trade and Economic Growth Study Guide

Vocabulary practice flashcards covering international trade theory, macroeconomic growth models, comparative advantage, factor mobility, and trade policy from ECON 6280.

Trade Balance

The difference between the value of goods and services sold to other nations and those bought from other nations, calculated as $\text{Exports} - \text{Imports}$.

Value Added

An approach to calculating Gross Domestic Product ($GDP$) defined as total industry revenues minus the cost of intermediate inputs.

Purchasing Power Parity (PPP)-Adjusted Exchange Rate

An exchange rate calculated by adjusting for differences in price levels across nations, appropriate when comparing living standards and real $GDP$ per capita.

Convergence

The economic hypothesis stating that lower-income countries tend to grow faster than wealthier countries, allowing them to close the income gap over time.

Middle Income "Trap"

A phenomenon where developing economies experience slowing economic growth or stop converging with high-income economies because they have less room to catch up.

The Four I's of Economic Growth

The four central drivers of growth and convergence: Innovation (shifts the technological frontier), Initial Conditions (determines potential for catch-up), Investment (accumulates physical, human, and technological capital), and Institutions (creates incentives for stability and property rights).

Ricardian Model

A trade model assuming labor is the sole factor of production, constant returns to scale, perfect competition, and identical products across two countries, where comparative advantage is driven purely by differences in labor productivity.

Production Possibilities Frontier (PPF)

A schedule or curve depicting the maximum combinations of two goods an economy can produce given total labor supply, having a slope of $-MPL_Y / MPL_X$ that reflects the opportunity cost.

Terms of Trade

The ratio of the price of a country's exported goods to the price of its imported goods ($\text{Price of exports} / \text{Price of imports}$), where an increase signifies improved national welfare.

Specific Factors Model

A short-run international trade model with multiple inputs (such as labor, capital, and land) subject to diminishing returns, where some factors cannot move between sectors while labor is freely mobile.

Specific Factor Income Distribution Principle

A theorem stating that a rise in an output's relative price raises the real rental return earned by the factor specific to that expanding sector, reduces the real rental of factors specific to other sectors, and leaves the change in mobile labor's real wage ambiguous.

Heckscher-Ohlin (HO) Model

A long-run international trade model featuring two countries, two mobile factors (labor and capital), and two goods with differing factor intensities, demonstrating that comparative advantage arises from differences in national factor endowments.

Factor Intensity

The ratio of labor to capital ($L/K$) utilized in producing a good; an industry is considered labor-intensive if its labor-to-capital ratio exceeds that of another industry at any given relative wage-to-rental ratio ($W/R$).

Heckscher-Ohlin Theorem

A theorem predicting that a country will export the good that utilizes intensively its relatively abundant factor of production and import the good that utilizes intensively its relatively scarce factor.

Stolper-Samuelson Theorem

A proposition establishing that in the long run with fully mobile factors, an increase in the relative price of a good increases the real earnings of the factor used intensively in producing that good and decreases the real earnings of the other factor.

Leontief's Paradox

The empirical finding by Wassily Leontief that post-World War II United States imports were more capital-intensive than its exports, contradicting the standard predictions of the Heckscher-Ohlin theorem.

Effective Factor Endowment

A country's productive factor availability adjusted for quality and technological differences, calculated as $\text{Actual factor endowment} \times \text{Factor productivity}$.

Monopolistic Competition Trade Model

A model showing that identical countries can engage in mutually beneficial trade through internal increasing returns to scale, fixed costs, and consumer preference for variety, resulting in lower prices and zero long-run economic profits ($P = AC$).

Melitz (2003) Model

A trade model featuring heterogeneous firm productivities and fixed exporting costs per market, showing that trade liberalization causes the least productive firms to exit and enables the most productive firms to expand into export markets.

Intra-Industry Trade

The simultaneous export and import of differentiated goods belonging to the same broad product classification, driven by economies of scale and consumer demand for variety.

Gravity Model of Trade

An empirical formula predicting bilateral trade volume based on economic size and geographic separation, expressed as $\text{Trade} = B \cdot \frac{GDP_1 \cdot GDP_2}{\text{dist}^n}$.

Border Effect

The empirical observation that the volume of trade between regions within the same national borders is substantially greater than trade between regions separated by an international border, holding $GDP$ and distance constant.

Consumer Surplus (CS)

The economic gain accrued to consumers, measured as the total dollar area beneath the demand curve and above the prevailing market price line.

Producer Surplus (PS)

The economic gain realized by producers, measured as the total dollar area above the market supply curve and beneath the prevailing price line.

Specific Tariff

A fixed monetary tax assessed per unit of an imported good upon crossing the national border, elevating the domestic market price above the world level by the amount of the tariff ($P^W + t$).

Deadweight Loss of a Tariff

The net economic efficiency loss caused by an import tariff, comprised of production loss triangle $b$ (waste from producing units at marginal costs above the world price) and consumption loss triangle $d$ (loss in consumer surplus from reduced total quantity demanded).

Safeguards

Temporary, WTO-sanctioned import restrictions (such as Section 201 or Section 421 actions) permitted to protect a domestic industry experiencing severe harm due to an unexpected surge in foreign imports.