Theories of International Trade – Key Vocabulary

25 vocabulary flashcards covering major concepts, theories, benefits, limitations, and key economists related to international trade.

International Trade

Exchange of goods, services, and resources across national borders involving residents of different countries.

Benefits of International Trade

Stimulates economic efficiency, growth, higher incomes, wider markets, and competitive prices for consumers.

Division of Labour (in trade)

Specialisation of production tasks across firms or nations, raising quantitative and qualitative productivity benefits.

Foreign Exchange Reserves

International currencies earned from exports that finance essential imports and stabilise a nation’s economy.

Trade Openness

Degree to which a country permits free cross-border flow of goods, services, and factors of production.

Economic Exploitation (trade context)

Outcome where weaker countries are outperformed or dominated by financially stronger transnational corporations.

Environmental Damage from Trade

Over-exploitation of natural resources and ecological harm resulting from intensified export-oriented production.

Trade Cycles Transmission

Rapid spread of economic booms and crises from one country to others through international trade links.

Mercantilism

16th–18th-century doctrine advocating export maximisation, import restriction, and hoarding of gold and silver to gain national power.

Zero-Sum Game

Situation where one participant’s gain equals another’s loss; mercantilists viewed trade this way.

Specie

Money in the form of precious metals such as gold or silver, viewed by mercantilists as national wealth.

Absolute Advantage

Ability of a country to produce a good more efficiently (with fewer resources) than another country.

Assumptions of Absolute Advantage

Two countries, two commodities, no transport cost, labour mobile domestically but immobile internationally, costs measured solely by labour hours.

Comparative Advantage

Ability of a country to produce a good at lower opportunity cost than another, forming the basis for mutually beneficial trade.

Opportunity Cost

Value of the next-best alternative forgone when choosing one option over another; core to comparative advantage.

Heckscher-Ohlin (Factor Endowment) Theory

Modern theory stating that countries export goods using their abundant factors intensively and import goods needing their scarce factors.

Factor Endowments

Relative national abundance of production inputs such as labour, capital, land, and natural resources.

Labour-Intensive Goods

Products whose production requires a high proportion of labour relative to capital; exported by labour-abundant countries.

Capital-Intensive Goods

Products requiring a high proportion of machinery and equipment; exported by capital-abundant countries.

Paul Krugman

American economist awarded the 2008 Nobel Prize for work on economic geography and New Trade Theory.

New Trade Theory (NTT)

Krugman’s framework explaining trade between similar countries through economies of scale and network effects rather than factor endowments.

Economies of Scale

Cost advantage whereby average cost per unit falls as output increases, encouraging firms to serve both domestic and foreign markets.

Network Effects

Increased value of a good or service as more people use it, creating a ‘bandwagon effect’ (e.g., WhatsApp, Windows).

Global Value Chain Upgrade

Process by which emerging economies improve product quality and standards to capture higher-value segments in world markets.

Export Diversification

Broadening of a country’s export base into new products or markets to reduce dependency and open new production possibilities.