700 – International Economics
The Stolper-Samuelson effect
There is a one-to-one relationship between goods prices and factor prices.
As the factor price ratio w/r rises, the price of the labour-intensive good will rise.
Biased growth
Shifts production possibilities out more toward one good than toward another. Due to:
- Technological progress in one sector of the economy
- An increase in a country’s supply of a factor of production
Immiserizing growth
“Export-biased growth by poor nations will worsen their terms of trade so much that they
would be better of with no growth at all.”
The Rybczynski effect
The biased effect of changes in resources.
An increase in the supply of land will expand production possibilities disproportionately in
the direction of the land-intensive good. At an unchanged relative price the production of the
labour-intensive good will actually decline.
Marginal product of labour (MPL)
MPL is the increase in output that would be gained by using a little bit more labour.
International labour migration model
Labour migrates from home to foreign until wages are equalized.
MPL = wage. A labour movement will continue until the MPL is the same in the two
countries.
Specific factors model (“sticky factors”)
Factors of production may temporarily be “stuck” in an industry. A fall in the relative price of
a labour intensive good will benefit the landowners in the long run, but can make them worse
of in the short run since their land is “stuck” in the production of the labour intensive good.
Absolute advantage
When one country can produce a unit of good with less labour than another country it has an
absolute advantage.
Comparative advantage
A country has a comparative advantage if the opportunity cost of producing a good in terms
of another good is lower there than it is in the other country.
Production possibility frontier (PPF)
The PPF shows the maximum amount of goods that can be produced given limited resources.
The slope is the opportunity cost of good x in terms of good y.
Consumption possibilities
In the absence of trade, consumption possibilities are the same as production possibilities.
Once trade is allowed everyone can consume more, still within the budget constraint.
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700 – International Economics
GATT (General Agreement on Tariffs and Trade), WTO (World Trade Organisation)
In 1995 GATT became WTO. Countries negotiate different measures to liberalise trade in
trade rounds. Countries bind their tariffs so that they cannot be raised in the future.
Most Favoured Nation (MFN)
An exporting country will pay tariffs no higher than that of the nation that pays the lowest.
Preferential Trading Agreement (PTA)
Under PTA’s nations can apply lower tariffs on each others products than the rates on the
same goods coming from other countries. As a violation of the MFN principle, this is
forbidden. It is only allowed if it leads to free trade between the agreeing countries.
- Free Trade Area, free trade within the area but tariffs against the outside world.
- Customs union, the participating countries agree to charge the same tariff rate on each
imported good. Whether a customs union is desirable or undesirable depends on
whether it largely leads to trade creation or trade diversion.
Common Agricultural Policy (CAP)
An EU policy created to help European farmers. It began as an effort to guarantee high prices
by supporting purchasing when prices fell but became an export subsidy. In 2002 the CAP
cost the European taxpayers $50 billion.
Land-/Labour-intensive
The production of a good is land-intensive if it uses a higher ratio of land to labour compared
to another good. If the production of the other product uses a higher ratio of labour to land it
is labour-intensive.
Factor Price equalisation
In theory, international trade leads to complete equalisation of factor prices (wage rate, rent
on land). In the real world factor prices are not equalised because:
- Both countries may not produce both goods.
- Countries may have different technologies of production.
- Trade barriers and natural barriers prevent total equalisation of prices.
Heckscher-Ohlin model
The factor-proportions theory emphasizes the interplay between the proportions in which the
factors of production are available in different countries and the proportions in which they are
used in producing different goods.
A country will export that good which uses intensively its abundant factors and import that
good which uses intensively its scarce factors.
Heckscher-Ohlin-Vanek (HOV) model
The HOV model is amended to allow for technological differences, costs of trade based on
distance, non-traded goods and failure of factor price equalisation.
The Leontief paradox
The single biggest piece of evidence against the factor-proportions theory.
Although the U.S. has a high capital-labour ratio Leontief found in 1953 that U.S. exports
were less capital-intensive than their imports.
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700 – International Economics
Relative supply
The supplied amount of good A divided by the supplied amount of good B.
Relative demand
The demanded amount of good A divided by the demanded amount of good B.
World general equilibrium
World general equilibrium requires that relative supply equal relative demand, and thus the
world relative price is determined by the intersection of RD and RS.
Interindustry trade
Trade between two different industries, reflects comparative advantage.
Intraindustry trade
Trade within the same industry, does not reflect comparative advantage. Different countries
can produce differentiated goods within the same industry due to economies of scale.
Producer surplus
The difference between the price the producer is willing to sell for and the price actually
received, equals the area under the demand curve and above the price.
Consumer surplus
The difference between the price a consumer is willing to pay and the price actually paid,
equals the area above the supply curve and below the price.
Production distortion loss
Results from the fact that the tariff leads domestic producers to produce too much of the good
(due to a higher price at home).
Consumption distortion loss
Results from the fact that a tariff leads consumers to consume too little of the good (due to a
higher price at home).
Monopolistic competition model
The more firms there are the more intensely they compete and the lower is the industry price.
The more firms the less each firm sells and therefore the higher is its average cost.
The equilibrium price and number of firms occurs when price equals average cost.
Dumping
A pricing practice in which a firm charges a lower price for exported goods than it does for
the same goods sold domestically. The industry must be imperfectly competitive (firms set
prices) and markets must be segmented. Firms will price-discriminate when sales are more
price-responsive in one market than another.
Marginal revenue
The extra revenue a firm gains from selling an additional unit.
Internal economies of scale
Occur when the cost per unit depends on the size of an individual firm but not necessarily on
that of the industry.
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700 – International Economics
External economies of scale
Occur when the cost per unit depends on the size of the industry but not necessarily on the
size of any one firm. Three main reasons according to Marshall:
- A cluster of firms can support specialised suppliers
- A geographically concentrated industry allows labour market pooling
- A geographically concentrated industry helps foster knowledge spillovers.
Tariff
A tax levied either as a fixed charge for each unit of goods imported (specific) or as a fraction
of the value of the imported goods (ad valorem).
Optimum tariff
The optimum tariff is the tariff rate that maximizes national welfare. It is always positive but
less than the prohibitive rate that would eliminate all imports.
Export subsidy
A payment to a firm or individual that ships a good abroad, either specific (a fixed sum per
unit) or ad valorem (a proportion of the value exported).
Terms of trade
The price of a country’s exports divided by the price of its imports. A rise in the terms of trade
increases a country’s welfare, while a decline in the terms of trade reduces its welfare.
Import demand
Home import demand is the excess of what Home consumers demand over what Home
producers supply.
Export supply
Foreign export supply is the excess of what Foreign producers supply over what Foreign
consumers demand.
Import quota
A nontariff barrier that limits the quantity of imports.
Import quota rents
An import quota restriction is usually enforced by issuing licenses to some group of
individuals or firms. An import quota always raises the domestic price of the good. The profits
received by the license holders are known as import quota rents.
Voluntary Export Restraint (VER)
A quota on trade imposed from the exporting country’s side instead of the importers. From an
economic point of view, a VER is exactly like an import quota where the licenses are assigned
to foreign governments and is therefore very costly to the importing country.
Intertemporal trade
Trade of goods today for goods in the future.
Direct foreign investment
International capital flows in which a firm in one country acquires control in another by
creating or expanding a subsidiary. An important part of international capital movement.
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700 – International Economics
Import substitution
An attempt to accelerate domestic development by limiting imports of manufactured goods to
foster a manufacturing sector serving the domestic market.
Infant industry argument
The argument for temporary protection of industries to enable them to gain experience and
grow strong enough to meet international competition.
Export promotion
An attempt to accelerate domestic development by exporting manufactured goods, primarily
to advanced nations.
Domestic market failure argument against free trade
If some market in the country is not doing its job right – the labour market is not clearing, the
capital market is not allocating resources efficiently, and so on – there can be a marginal
social benefit that justifies tariffs or other trade policies.
The theory of the “Second best”
Imperfections in the internal functioning of an economy may justify interfering in its external
economic relations. A direct action would be best, but if that cannot be done a “second best”
solution may solve the problem.
Logic of collective action argument
While it is in the interest of the group as a whole to press for favourable policies, it is not in
any individual’s interest to do so. The problem can be overcome when a group is small and/or
well organized.
The Brander-Spencer analysis
When there are excess returns, it is possible in principle for a government to alter the rules of
the game to shift those excess returns from foreign to domestic firms. For example; a subsidy
to domestic firms, by deterring investment and production by foreign competitors, can raise
the profits of domestic firms by more than the amount of the subsidy. Since this is done at
other countries’ expense you risk retaliation and trade wars.
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