International Economics Midterm

Economic Integration

Began in 1950’s, cooperation between countries to reduce trade barriers. Measured by trade flows, capital flows, human flow, and similarity of prices.

Trade to GDP Ration

Exports+Imports / GDP . Measures the importance of international trade to a nations economy.

Foreign Direct Investment

Investment in tangible (business/real estate) in other countries.

Transaction Cost

Obtaining market info, negotiating agreement, and enforcing agreement

Adam Smith

Anti mercantilism, against trade barriers because they decrease specialization

Zero-sum

One nations gain is another’s loss

Ricardian Model

2 countries make 2 goods, using 1 input — market is competitive. All things must be equal. Productivity vs. labor

Labor Productivity

Output/hrs worked

Opportunity Cost

P = X/Y = P(X/Y)

Production Possibility Curve

Shows a trade off between unit 1 vs unit 2. If I produce 2 breads, I can only produce 1 butter.

Relative Price

Trade off price.

Autarky

Complete absence of international trade

Absolute Productivity Advantage

The highest productivity advantage

Comparative productivity advantage

Country’s opportunity cost is lower than others. Can still gain from trade because it’s comparative

Trade Adjustment Assistance

Programs like unemployment, retraining programs, etc

Slope in Economics

Y=A+BX

Intercept

X = 0, Y = A

Marginal Cost

Small amount goes up

Equilibrium

The amounts demanded are equal to the amounts supplied

Concave PPF

Have to give up more and more y for each x you produce

Externality

Outside affect to economy and production

Margin

The cost of unit change in x in terms of Y

Law of diminishing return

Productivity goes down while producing more and more

Static Gains from Trade

Gains immediately from trade

Dynamic Gains from Trade

Gains occur over time

Consumer Surplus

I’m willing to pay $2, the price is $1.50, so I gained 50 cents

Producer Surplus

I produce at $1, consumer is willing to pay $2, my surplus is $1

Deadweight Loss

Destruction of value not compensated by a gain elsewhere

Rent Seeking

Any activity that uses resources to try to capture more income without produce a good or service

Nominal rate of production

rate levied on a given product

Effective rate of production

nominal rate and the tariffs on intermediate inputs

Quotas

Quantitative restrictions that specify a limit on the amount of imports

Voluntary Export Restraint

Exporting country agrees to limit export (usually not consensual)

Non-tarrif Barriers (NTB)

Quotas and non tariff measures that are hidden (like regulations, bans, etc)

Protection Tariff

We have unemployed resources so lets tariff important goods to raise domestic production (often creates retaliatory tariffs)

Marginal Opportunity Cost

If I produce 1 more unit of X, is what I lose from Y

Elements of Demand

Income, tastes, prices of other goods, income

Arbitrage Rule

If there are 2 different prices for an item, then I’m buying low selling high

Non Arbitrage Rule

Things move so fast, that buying low selling high is basically impossible

Consumer Surplus

Demand as a marginal benefit

Tariffs

Tariffs are better than autarky but worse than free trade. There will be a shift in demand from tariffs, price of imports go down relative to exports, welfare enhancing. But may not be enough to offset

Optimal Tariff

As one raises the tariff, the world price drops, there is a perfect number - but hard to implement. Risk of retaliation

HO Model

A capital abundant country will export capital intensive goods while labor abundant country will export labor extensive goods.

Gravity Model

Size measured by GDP + Distance measured by distance between commercial centers. The closer the two countries are, the cheaper to move goods

Product Cycle

New tech goes from high capital countries able to risk → standardization → low capital countries

OLI Theory

Ownership → location → internalization

• Ownership = owning a valuable asset has potential advantage on a firm

• Location = location that has advantage

  • Internalization = try to capture all advantage that ownership gives

Offshoring

moving some or all activities to a different country

Outsourcing

reassign some activities to another firm in our out of the country

Foreign Affiliate

Foreign based operation owned by a firm in the home country

Global Value Chain

Engine made in mexico, battery in china, car assembled in the US

Export Subsidy

Can distort comparative advantage and create dumping. Make WP lower but local price higher, usually the country is worse off

Real Wage

Adjustment for inflation

The Leotief Paradox

There is a limitation of factor endowment theories

• the US should import labor goods and export capital, but they are doing the opposite, why?

Factor Endowment Theory

HO Theory. If the US is rich in human capital, we export human capital goods.