International Economics Final Set

What key change is introduced in the production model compared to the pure exchange model?

People now produce goods using labor, rather than starting with an endowment

What does a Production Possibilities Frontier (PPF) show?

All combinations of two goods a person can produce using all available resources

Why is the PPF downward sloping?

Because producing more of one good means producing less of another due to limited resources

What is opportunity cost?

The value of what you give up to get something else

How do you calculate the opportunity cost of oranges in terms of apples?

Apples/oranges

What is absolute advantage?

When someone can produce more of a good using the same resources as someone else, higher productivity

What is comparative advantage?

When someone can produce a good at a lower opportunity cost than someone else

Can someone have an absolute advantage in both goods but still benefit from trade?

Yes, because comparative advantage depends on opportunity cost not productivity

Why do people/countries specialize in trade?

Specialization in the good with the lowest opportunity cost increases total output and allows for mutually beneficial trade

How does trade lead to higher utility?

After specialization and trade, people can consume more than they could produce alone, reaching a higher indifference curve

What is autarky?

No trade, each person consumes only what they produce

What changes in the Edgeworth Box after specialization?

The box gets bigger because there are more total goods

What did David Ricardo show about trade in 1817?

Even if one country has an absolute advantage in everything, both can gain from trade if they specialize based on comparative advantage

What is the pure exchange model?

A model where two people trade goods they already have, with no production, assuming voluntary, ethical trade

What is the goal of both traders in the pure exchange model?

To maximize their utility by trading to get a bundle of goods they like more

What is an indifference curve?

A line that shows all combinations of two goods that give a person the same utility

What does it mean when indifference curves are farther from the origin?

Higher utility

What is the Edgeworth Box used for?

Show all possible allocations of two goods between two people and how trade can make both better off

What is the initial endowment?

The point showing how much of each good each person starts with before trade?

What is a Pareto optimal point?

A point where no one can be made better off without making the other worse off, where two indifference curves are tangent

What does the lens in the Edgeworth Box represent?

Between indifference curves where there are mutual gains

What are the terms of trade?

The rate at which one good is exchanged for another

What happens if ethical rules are violated in trade?

The market fails and mutual benefits disappear

What is an intermediary in trade?

A person or firm that helps connects buyers and sellers, reducing transaction costs

What is production efficiency in free trade?

Producing more goods with the same resources by specializing based on comparative advantage

What is consumption efficiency in free trade?

Consumers access more satisfying choices and variety at lower prices

What trade models show gains from trade?

Ricardian, Heckscher-Ohlin, specific factors, economies of scale

What does the Ricardian model emphasize?

Gains from trade based on technological differences between countries

What does the Heckscher-Ohlin model emphasize?

Trade based on countries’ abundant factors of production

Why do most economists support free trade?

Because a collection of models shows it improves national welfare

What is a key criticism of free trade?

It causes income redistribution, some gain others lose

What is the compensation principle?

Winners from trade can compensate losers

Why is the compensation principle impractical?

Hard to identify and measure all winners, losers, and timing

What is lump-sum redistribution?

Transfer of gains after consumption to maintain efficiency

What is the terms of trade argument for protectionism?

A large country can improve its trade terms with tariffs

What is the infant industry argument?

Temporary protection helps new industries grow by learning to become competitive

What is strategic trade policy?

Government support helps firms win in global oligopolies

How does protection address environmental externalities?

Tariffs can shift production to cleaner domestic sources

Why is national security a trade concern?

Some exports may aid enemy countries or threaten security

When can protection raise welfare in imperfect markets?

When it corrects distortions

What is market efficiency?

An efficient allocation of resources where society benefits

What prevents markets from being efficient?

Market imperfections

List examples of market imperfections

Poor information, externalities, monopolies, public goods, and ethical violations

What are public mechanisms to correct market imperfections?

Laws, courts, police, and trade regulation

What are private mechanisms to correct market imperfections?

Reputation, family norms, religion, and ethics

What is the role of institutions in market efficiency?

Establish rules and enforcement to reduce risk and enable fair trade

What is consumer surplus?

The difference between what consumers are willing to pay and the market price

What is producer surplus?

The difference between the market price and the minimum amount a seller is willing to accept

What happens to consumer and producer surplus when a country imports?

Consumer surplus increases because prices fall, producer surplus decreases because domestic producers get less per unit

What happens to consumer and producer surplus when a country exports?

Consumer surplus decreases due to higher prices, producer surplus increases because prices rise

What is partial equilibrium analysis?

Focuses on a single market using supply and demand to analyze trade effects

What are the assumptions of partial equilibrium analysis?

Perfect competition, and no broader effects like income or employment changes

What does trade typically do to total surplus?

It increases total surplus, even if some groups lose

When and why was the General Agreement on Tariffs and Trade (GATT) established?

1948, to reduce global barriers to trade and prevent protectionism

What does the Most Favored Nation (MFN) principle require?

Countries must treat all WTO trading partners equally in tariff policies

What does the National Treatment principle mean?

Imported goods must be treated the same as domestic goods after entering the country

What are antidumping measures used for?

To counter foreign imports sold below fair value that hurt domestic industries

What are countervailing duties (CVDs)?

Tariffs to offset foreign government subsidies that unfairly lower export prices

When are safeguard measures used?

To protect domestic industries from import surges

When and why was the World Trade Organization (WTO) created?

1995, as the successor to GATT

What major trade topics were added in the Uruguay Round?

Services, intellectual property, and agriculture

What are the 4 steps in WTO dispute settlement?

Consultation, panel formation, appeal, and resolution

What is a bound tariff?

The maximum tariff rate agreed to in WTO negotiations

What is an applied tariff?

The actual tariff rate charged, usually lower than the bound rate

How is trade-weighted average tariff calculated?

Tariff revenue divided by the value of imported goods

What is a Regional Trade Agreement (RTA)?

An agreement among countries in a region to reduce or eliminate trade

What does GATT Article 24 allow?

Exceptions for FTAs and customs unions

What is a Preferential Trade Arrangement (PTA)?

A limited agreement offering reduced tariffs to specific countries or products

What is game theory in trade?

The study of strategic decision-making between countries where outcomes depend on mutual actions

Why is free trade considered cooperative?

Because it maximizes mutual gains from specialization

Why can Nash Equilibrium lead to suboptimal outcomes?

Because countries act in self-interest, leading to mutual tariffs and lower welfare

What is the Prisoner’ Dilemma in trade?

A scenario where both countries would be better off with free trade but fear of exploitation leads both to impose tariffs

How can countries escape the trade Prisoner’s Dilemma?

Through repeated interaction, trust, and enforcement institutions like the WTO

How does scarcity affect trade?

Countries trade for goods they lack but others have

How does quality affect trade?

Higher quality goods can attract more buyers and be sold at higher prices

How does persuasion affect trade?

Sellers influence buyers choices through value framing

What is expected utility in trade?

Buyers trade based on expected satisfaction from goods

What happens when a third trader enters the market?

Shifts relative scarcity and therefore trade prices and benefits

What is a monopoly?

One seller of a product, controls price and supply

What is a monopsony?

One buyer of a product, controls price and demand

What are trade’s distributional effects?

Some groups gain, others lose

What is a specific tariff?

Fixed amount per unit of import

What is an ad valorem tariff?

Tariff as a percentage of value

What is a two-part tariff?

Combines specific and ad valorem tariffs

How do tariffs help producers?

Limit foreign competition, raise prices

How do tariffs hurt consumers?

Raise prices

What is an import license?

Government approval to import goods

What is an export tax?

Tax on goods sold abroad

What is an export subsidy?

Government aid to boost exports

What was the China Shock?

US job losses after China joined WTO in 2001

What is the Walmart effect?

Cheap Chinese goods lowered prices at large retail stores like Walmart

How did China trade affect inequality?

Helped buyers, hurt factory workers

Jobs gained in the export industry

7 million

US jobs lost monthly due to China Shock

15,000 jobs

US job layoffs monthly post-covid

2 million

Real income increase of the poorest US workers due to trade

69%

Why does everyone benefit from trade in the Ricardian model?

Because specialization and trade allow individuals to consume more goods than they could without trade

What is income redistribution?

A result where winners receive higher income and losers receive lower income

What is mutually voluntary exchange?

A trade where both parties willingly trade items expecting to be better off

What is a positive-sum game?

When both parties in a trade benefit