Trade Models and Economic Concepts

Practice flashcards for reviewing concepts from the lecture on trade models and economic principles.

What is the long-run model of trade that addresses the mobility of factors of production?

The Heckscher-Ohlin model.

What does the Heckscher-Ohlin theorem explain about trade patterns?

It explains patterns of trade using abundance or scarcity of resources.

What assumption does the Heckscher-Ohlin model make about the nations involved?

There are only two nations, with two goods and two factors of production.

In a capital-intensive industry, what happens to the labor/capital ratio as the wage/rental ratio falls?

It falls as the wage/rental ratio falls.

Which statement is NOT an assumption of the Heckscher-Ohlin model?

Labor and capital can move freely between the two countries.

What is true about consumer tastes across nations according to the Heckscher-Ohlin model?

It is unrealistic to assume they are the same across nations.

According to the shapes of two PPFs, which nation has a comparative advantage in computers?

There is not enough information to answer this question.

Wages are generally higher in which type of countries?

In labor-abundant countries compared to capital-abundant countries.

According to the Heckscher-Ohlin model, what advantage does Malaysia have in producing shirts?

Comparative advantage.

What does the Heckscher-Ohlin model assume about factors of production?

They can move freely domestically, but cannot move internationally.

What was paradoxical about Leontief's test of the HO model on U.S. trade?

U.S. imports were more labor intensive than U.S. exports.

In a labor-abundant country, what happens to the rental of capital and the marginal product of capital with free trade?

Rental of capital decreases, and the marginal product of capital decreases.

What will Italy export according to the HO model?

Wine.

What products are characteristic of monopolistic competition?

Differentiated products.

What does intra-industry trade refer to?

Imports and exports within the same industry.

Equilibrium in a monopoly occurs when which conditions are met?

MR equals MC.

What is NOT an assumption of standard monopolistic competition?

Firms produce goods using technology with increasing returns to scale.

Firm X's production function exhibits increasing returns to scale. What does that indicate?

Output increases by more than proportionately to inputs used.

If MR < MC for a monopolist, what should the monopolist do?

Not produce this output.

What is the average cost for a monopolistic competitor producing 100 units with fixed costs of $100 and marginal costs of $10?

$11.

In the long run, a monopolistically competitive firm will be where?

Average cost equals price.

What type of returns to scale does the production function F(K,L) = A K^α L^(1-α) exhibit?

Constant returns to scale.

If an industry has exports of $100 million and imports are zero, what is the index of intra-industry trade?

0.

How do larger countries generally trade?

More with one another, supported by the gravity equation.

According to the gravity equation, who will the U.S. trade more with?

Canada than with Bangladesh.

What does a higher index of intra-industry trade indicate?

A greater percentage of trade in that good is intra-industry.

What is the nature of import tariffs and quotas on imports?

Tariffs are taxes; quotas are limits.

What happens to Norway's lumber imports when it starts trading at a world price of $500?

Norway imports 150,000 board feet.

If the world price of a product is $15, what is the total consumer surplus?

$1,395.

What is the increase in surplus when a small country trades compared to autarky with a world price of $1?

$4.50.

Under free trade, how much will the Home country import?

22.

What effect does a 25% tariff on imported pickup trucks have when the U.S. is large?

The price increase will be less than 25%.

What is the key difference between a tariff and a quota?

A tariff generates government revenue; a quota benefits domestic firms directly.

Who collects quota rents when quotas are enforced?

Domestic producers.

What defines consumer surplus?

The difference between the price of a product and consumers' valuation of the last unit purchased.

What is the increase in producer surplus if demand increases and equilibrium price is 30?

$625.