International Economic Institutions and Trade Theory

Practice flashcards formatted as questions and answers based on Chapters 2 through 5 of international economics lecture notes.

What three major international economic institutions were created following or as a direct result of the 1944 Bretton Woods conference and subsequent postwar talks?

The International Bank for Reconstruction and Development (IBRD, or World Bank), the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT, which later became the WTO).

How do economist Douglas North and the 'New Institutionalists' define institutions?

They define institutions not as formal organizations themselves, but as the written or unwritten rules that govern behavior, specifying what is permissible and acting as constraints that limit actions.

How does the International Monetary Fund (IMF) determine a member country's quota fee and voting power?

A nation's quota fee varies based on the size of its economy and the importance of its currency in world trade and payments; its voting power within the IMF is directly proportional to its quota.

What is IMF conditionality?

IMF conditionality is an agreement required by the IMF forcing a borrowing country to change its economic policies and reform the relationship between government and markets to qualify for loan funds.

Why did the World Bank shift its focus from post-WWII European reconstruction to nonindustrial developing economies?

Its capital reserves were inadequate for rebuilding Europe, and the United States preferred direct control over reconstruction funds via the Marshall Plan.

What are the two foundational principles of all GATT and WTO trade agreements?

National treatment (treating foreign goods similarly to identical domestic goods once they enter a market) and nondiscrimination (embodied in most-favored nation [MFN] status).

Which GATT negotiation rounds correspond to the years and participant numbers shown in this historical summary table?

The nine GATT negotiation rounds shown are: Geneva I (1947, 23 participants), Annecy (1949, 13), Torquay (1951, 38), Geneva II (1956, 26), Dillon (1960–1961, 26), Kennedy (1964–1967, 62), Tokyo (1973–1979, 102), Uruguay (1986–1993, 105), and Doha (2001–, 164 participants).

What are the five main levels of Regional Trade Agreements (RTAs), ordered from least integrated to most integrated?

Partial trade agreement, free-trade area, customs union, common market, and economic union.

What two economic characteristics define a public good?

Public goods are nonexcludable (the price mechanism cannot regulate access) and nonrival or nondiminishable (consumption by one person does not diminish availability for others).

According to economist Charles Kindleberger, what four international public goods are essential for maintaining global economic stability?

Open markets in a recession, capital flows to less-developed countries (LDCs), international money for settlement of international debts, and last-resort lending.

What was the key flaw in mercantilist economic thought identified by Adam Smith?

Mercantilists mistakenly viewed international trade as a zero-sum activity (where one nation's gain is another's loss) rather than a positive-sum voluntary exchange that benefits both parties.

In the Ricardian trade model, what is the mathematical expression for labor productivity?

Labor productivity is calculated as $\text{Labor Productivity} = \frac{\text{units of output}}{\text{hours worked}}$.

How do absolute productivity advantage and comparative productivity advantage differ?

Absolute advantage means producing more output per hour worked than a competitor, whereas comparative advantage means having a lower opportunity cost in producing a good compared to a trading partner.

In a Production Possibilities Curve (PPC) diagram like the one shown, what do points A, B, and C signify regarding output efficiency and feasibility?

Point B represents efficient production utilizing all resources fully; Point A represents inefficient and wasteful production inside the curve; Point C represents an infeasible output combination beyond current resources.

How is the opportunity cost of the good on the horizontal axis calculated from a Production Possibilities Curve (PPC)?

It is calculated as the negative slope of the PPC: $\text{Opportunity Cost} = \frac{\Delta \text{vertical good}}{\Delta \text{horizontal good}}$.

If the United States produces $2\,\text{loaves}$ of bread or $3\,\text{tons}$ of steel per hour, what are the barter prices of bread $P_b^{us}$ and steel $P_s^{us}$?

The U.S. barter price of bread is $P_b^{us} = \frac{3\,\text{tons}}{2\,\text{loaves}} = 1.5\,\text{tons/loaf}$, and the barter price of steel is $P_s^{us} = \frac{2\,\text{loaves}}{3\,\text{tons}} = 0.67\,\text{loaves/ton}$.

Under what condition will two trading nations both benefit from the international exchange of a commodity?

Both nations benefit as long as the world trade price settles strictly between the pre-trade domestic opportunity costs (autarky relative prices) of the two countries.

In this trade model diagram, how does specialization at point B enable the United States to maximize its consumption possibilities?

By completely specializing steel production at point B on its PPC and trading along consumption possibilities curve CPC' (with slope $-2$), the United States can reach point C, consuming a larger bundle of both goods than possible under autarky or incomplete specialization at point A.

What is economic restructuring, and why does international trade induce it?

Economic restructuring refers to changes in the economy requiring some industries to expand and others to shrink or disappear as resources shift toward sectors of comparative advantage.

What does the Heckscher-Ohlin (HO) trade model assert about the foundation of comparative advantage?

The HO model asserts that a country's comparative advantage lies in producing goods that intensively use its relatively abundant factors of production.

In the Heckscher-Ohlin model, how is factor abundance defined mathematically when comparing the capital ($K$) and labor ($L$) endowments of the United States and Canada?

The United States is capital abundant and Canada is labor abundant if $\frac{K_{us}}{L_{us}} > \frac{K_{can}}{L_{can}}$.

Why does the Heckscher-Ohlin model assume an increasing-cost PPC rather than a constant-cost PPC?

Because the HO model incorporates multiple inputs (such as skilled/unskilled labor, capital, and land) with varying suitabilities for different output tasks, causing the marginal opportunity cost to rise as resources shift.

What does the Stolper-Samuelson theorem state regarding output prices and factor returns?

It states that an increase in the price of a good raises the income earned by factors used intensively in its production, while lowering the income of factors used intensively in the import-competing sector.

How do specific factors and variable factors differ in the Specific Factors model?

Specific factors (like land or capital) are immobile and can only be used in one specific industry, while variable factors (like labor) are completely mobile across sectors.

What is the 'resource curse' in international economics?

A phenomenon where a large endowment of a single valuable natural resource crowds out the development of other economic sectors, creating economic instability and political turmoil.

What relationship does the gravity model of trade express between two countries?

It predicts that trade volume between two nations increases with the size of their economies (measured by GDP) and decreases with the geographical distance between them.

What are the three sequential phases of Raymond Vernon's product cycle model?

The early phase (innovation and high-income market proximity), the middle phase (standardization and shifting production to lower-cost locations), and the late phase (consumption in high-income nations exceeds domestic output, shifting production to LDCs).

What do the letters stand for in John Dunning's OLI framework of foreign direct investment?

Ownership (owning a unique competitive asset), Location (advantages of foreign production sites), and Internalization (retaining the asset's advantages inside the firm rather than licensing).

How do off-shoring and outsourcing differ?

Off-shoring is the movement of a firm's activities to a location outside its home country; outsourcing is the reassignment of activities to another firm (located either domestically or abroad).

What is the difference between interindustry trade and intraindustry trade?

Interindustry trade is international trade of products between different industries (e.g., bread for steel), whereas intraindustry trade is international trade of products within the same industry (e.g., cars for cars).

What market structure typically results from internal economies of scale paired with product differentiation?

Monopolistic competition, where numerous firms compete by offering slightly differentiated, close-substitute products.

What are two distinct consumer benefits created specifically by intraindustry trade?

Lower prices for both imports and exports (due to firms realizing scale economies in larger markets) and an increased variety of consumer choices.

What three factors drive external economies of scale in regional industrial clusters?

Knowledge spillovers between nearby firms, a deep labor market for specialized skills, and a dense network of specialized input suppliers.

What is a market failure, and how does it relate to private and social returns?

A market failure occurs when a free market produces a non-optimal quantity of goods due to a divergence between private returns and social returns caused by external costs or benefits (externalities).

Which three specific Uruguay Round GATT agreements severely constrain member nations' industrial policy tools?

Trade-Related Investment Measures (TRIMs), Subsidies and Countervailing Measures (SCM), and Trade-Related Aspects of Intellectual Property Rights (TRIPS).