Ricardian Model
Productivity is based on technology difference
Analyzes interational trade under the assumption that opportunity costs are constant
Hecksher-Ohlin model
A country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country. This would lower production costs.
Trade
trade increases world production of both goods, allowing both countries to consume more
move towards production of good of comparative advantage
trade liberates both countries from self-sufficiency
Pauper Labor Fallacy
The concept states that when a country imports goods from an economy where the workers are lowly paid, it affects workers standards of living in such a country. (which is a myth)
Consumer surplus
Consumer surplus is the difference between the highest price a consumer is willing to pay and the actual market price of the good.
Producer surplus
Producer surplus is the difference between the market price and the lowest price a producer would be willing to accept.
Sources of comparative advantage
differences in climate (can also lead to absolute advantage)
differences in factor endowments (land, labour, capital, managerial talent which is management)
technology
productivity levels
Factor intensity
Factor intensity of a good is a measure of which factor is used in relatively greater quantitites than other factors in production.
Tariffs
tax or duty to be paid on a particular class of imports or exports
can be bad for free trade (free trade creates more GDP, and less loss, and more efficient allocation of resources)
Quota
With a quota, licenses are sold to companies that wish to import
Arguments for protectionism
• National Security (including food; high tech) • Job Creation (to help low skilled workers, and less mobile populations) • Infant Industry argument—argues that to jump start a sector, it has to be protected until it can stand on its feet (this does hold true, esp. in developing countries: the question is, how much protection is fair?)
Free trade agreements
• WTO • Replaces GATT in 1994 • Attempts to enforce statutes • NAFTA – also signed in 1993 • EU – Monetary Union by 2001 • TPP
Off-shoring
Relocate (a business or department) to a foreign country to take advantage of lower taxes or costs
It makes it very difficult to collect revenue
Economic slump
Keynesian econ: caused by inadequate spending, and they can be mitigated by government inter vention
Monetary policy
Uses change in quantity of money to alter interest rates and affect overall spending
Fiscal policy
Uses changes in government spending and taxes to affect overall spending
Recession
the state of the economy declines; a widespread decline in the GDP and employment and trade lasting from six months to a year
output and employment are falling
contractions
Expansion
The state of the economy improves
output and employment rise
recoveries
business cycle (growth cycle)
A short-run alteration between expansions and recessions
Business-Cycle peak
Economy goes from expansion to recession (can lead
Business-cycle trough
economy goes from recession to expansion
represents a slowdown or decline in GDP which leads to rising unemployment
can lead to inflation (people spend so there is upward pressure on prices)
low interest rates can lead to too much borrowing; creation of bubbles
Trade deficit
a country's imports exceed its exports during a given time period
Trade Surplus
a country's exports exceed its imports during a given time period
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