chapter 5 lib

Exporting / importing

Exporting is selling goods or services abroad; importing is buying them from abroad.

Trade in goods vs trade in services

goods are physical, services are intangible.

Balance of trade

Difference between a country's exports and imports

Trade surplus / trade deficit

Surplus: exports exceed imports. Deficit: imports exceed exports.

Classic trade theories

Mercantilism, absolute advantage, comparative advantage and factor endowments.

Modern trade theories

Product life cycle, strategic trade theory and the 'diamond' model.

Theory of mercantilism

Exports are good and imports are bad; nations should run trade surpluses and accumulate wealth (gold).

Theory of absolute advantage (Adam Smith)

Countries gain from specializing in what they produce more efficiently than others and trading.

Absolute advantage

Advantage a nation has from higher productivity in an activity.

Theory of comparative advantage (Ricardo)

Countries gain by specializing in what they do relatively better, even if they have no absolute advantage.

Opportunity cost

What is given up by choosing one use of resources over another.

Factor endowment theory (Heckscher-Ohlin)

Countries export goods that use their abundant factors and import goods that use scarce factors.

Resource (factor) endowments

A country's holdings of land, labour, capital and other inputs.

Resource mobility

How easily factors of production can move between locations or uses.

Product life cycle theory (Vernon)

Products go through new, maturing and standardized stages, and production shifts to lower-cost countries over time.

Strategic trade theory

Government intervention can help firms gain first-mover advantages in industries with economies of scale.

First-mover advantages

Benefits that early entrants gain over later ones, such as scale and brand.

Strategic trade policy

Government policy (e.g. subsidies) to help domestic firms gain advantage in strategic industries.

Porter's diamond model (national competitive advantage of industries)

Industry success depends on factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry.

Free trade

Trade without government-imposed barriers.

Protectionism

Policies that shield domestic industries from foreign competition.

Import tariff

A tax on imported goods.

Non-tariff barriers (NTBs)

Trade barriers other than tariffs, e.g. quotas, subsidies, local content rules and procurement preferences.

Import quotas

Limits on the quantity of a product that can be imported.

Subsidies

Government payments to domestic firms to help them compete.

Local content requirements

Rules that firms must use a minimum share of domestic components or labour.

Public procurement

Government purchasing, which can favour domestic suppliers.

Anti-dumping duties

Taxes on imports considered to be 'dumped' (sold unfairly cheaply).

Trade embargoes

Government bans on trade with a particular country, used as a foreign-policy tool.

Deadweight loss

Net economic loss to a nation resulting from tariffs.

Net effect of tariffs and NTBs

The nation as a whole is worse off while some special interest groups benefit.

Infant industry argument

New industries need temporary protection until they can compete globally.

Economic arguments against free trade

Protection from unfair competition, infant industries and unequal distribution of costs and benefits.

Political arguments against free trade

National security, consumer protection, foreign policy and environmental/social responsibility.

Transportation costs

Costs of moving goods that can limit trade and shape where production is located.

Debates on trade

Is a persistent trade deficit a grave concern, and how should rich countries respond to shifting comparative advantage?