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| Question | Answer |
| Define 'service outsourcing' | Service outsourcing can occur for services that can be performed and transmitted electronically. |
| What kind of products do nations trade now? | Today, most (about 55%) of the volume of trade is in manufactured products such as automobiles, computers, clothing and machinery. Services account for 20%, and mineral & agricultural products for a relatively small part of trade. |
| How did nations trade in the past? | In the past, a large fraction of the volume of trade came from mineral & agricultural products. |
| Which countries are the largest trading partners with the U.S.? | Canada, China, Mexico, Japan and Germany |
| What does the gravity model predict? | The gravity model predicts that the volume of trade is directly related to the GDP of each trading partner and is inversely related to the distance between them. |
| Which factors influence trade? | Size, distance, culture, geography, multinational corporations and the existence of borders influence trade. |
| What has increased trade? What has decreased trade? | Modern transportation and communication have increased trade, but political factors have influenced trade more in history. |
| Define the 'Ricardo model' | The 'Ricardo model' is the simplest model that shows how differences between countries give rise to trade and gains from trade. In this model, labor is the only factor of production, and countries differ only in the productivity of labor in different industries. |
| In the 'Ricardo model', what do countries export and import? | In the 'Ricardo model', countries will export goods that their labor produces relatively efficiently and will import goods that their labor produces relatively inefficiently. In other words, a country's production pattern is determined by comparative advantage. Furthermore, the 'Ricardo model' implies that comparative advantage rather than absolute advantage is responsible for much of international trade. |
| How does trade benefit a country? | There are two ways trade can benefit a country. First, we can think of trade as an indirect method of production. Instead of producing a good for itself, a country can produce another good and trade it for the desired good. Second, we can show that trade enlarges a country's consumption possibilities, which implies gains from trade. |
| A country gains from trade even if... | 1) ... it has lower productivity than its trading partner in all industries. 2) ... foreign industries are competitive only because of lower wages. 3) ... a country's exports embody more labor than its imports. |
| There is one basic prediction in the 'Ricardo model' that has been confirmed by a number of studies. Which one is it? | 'Countries will tend to export goods in which they have relatively high productivity.' Meaning, goods will always be produced where it is cheapest to make them. |
| How do you find out what the cost of making a good is? | The cost of making a certain good is the unit labor requirement times the wage rate. a x w |
| Define 'comparative advantage' and 'absolute advantag' | A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries. In other words, absolute advantage involves comparing unit labor requirements for a good across countries. Comparative advantage involves comparing unit labor requirements across countries and goods |
| How do you know which country produces which goods? | Which country produces which goods depends on the ratio of Home and Foreign wage rates. Remember, a country will always produce the goods where it is cheapest to make them. w x a < w* x a* rearranged: a*/a > w/w* Home will have a cost advantage in any good for which its relative productivity (a*/a) is higher than its relative wage (w/w*). |
| Countries in economics models are extremely specialized. This is not the case in the real international economy because... | 1) The existence of more than one factor of production reduces the tendency toward specialization 2) Countries sometimes protect industries from foreign intervention 3) It is costly to transport goods and services; in some cases the cost of transportation is enough to lead countries into self-sufficiency in certain sectors |
| What does the graph of a production possibility frontier illustrate? | The graph of a production possibility frontier illustrates trade-offs and the different mixes of goods the economy -can- produce. |
| Give two reasons why international trade has strong effects on the distribution of income outside of the simplified Ricardian model. | In the Ricardian model it is assumed that labor moves freely and that every individual gains from trade. In the real world, however, trade has substantial effects on the income distribution within each trading nation, so that in practice benefits of trade are often distributed very unevenly. 1) Resources cannot move immediately or without cost from one industry to another. 2) Industries differ in the factors of production they demand. |
| Explain the 'Specific Factors model' | The 'Specific Factors model' assumes an economy that produces two goods and that can allocate its labor supply between the two sectors. Unlike the Ricardian model, however, the 'Specific Factors model' allows for the existence of factors of production besides labor. Whereas labor is a mobile factor that can move between sectors, these other factors are assumed to be specific. That is, they can be used only in the production of particular goods. Assumptions of the model: - two goods -three factors of production (L, K and T) -perfect compensation prevails in all markets |
| Which factors in the 'Specific Factors model' gain or lose from trade? How can trade produce overall gains from trade? | In the 'Specific Factors model', factors specific to export sectors in each country gain from trade, while factors specific to import-competing factors lose. Mobile factors that can work in either sector may either gain or lose. Trade nonetheless produces overall gains in the limited sense that those who gain could in principle compensate those who lose while still remaining better off than before. |
| Explain what the marginal product of labor is | In economics, the marginal product of labor (MPL) is the change in output that results from employing an added unit of labor. Example: There is a factory which produces toys. When there are no workers in the factory, no toys are produced. When there is one worker in the factory, six toys are produced per hour. When there are two workers in the factory, eleven toys are produced per hour. There is a marginal product of labor of five when there are two workers in the factory compared to one. When the marginal product of labor is increasing, this is called increasing marginal returns. However, as the number of workers increases, the marginal product of labor may not increase indefinitely. When not scaled properly, the marginal product of labor may go down when the number of employees goes up, creating a situation known as diminishing marginal returns. When the marginal product of labor becomes negative, it is known as negative marginal returns. |
| Explain the law of diminishing marginal returns | Adding one worker to the production process (without increasing the amount of capital) means that each worker has less capital to work with. Therefore, each additional unit of labor adds less output than the last. |
| In a four-quadrant diagram, why is the production possibilities frontier curved? | Diminishing returns to labor in each sector cause the opportunity cost to rise when an economy produces more of a good. |
| Explain the Heckscher-Ohline model | The theory emphasizes the interplay between the proportions in which different factors of production are available in different countries and the proportions in which they are used in producing goods. |
| What is the basic Heckscher-Ohlin theory of trade? | Countries tend to export goods that are intensive in the factors with which they are abundantly supplied. |
| In the Heckscher-Ohlin model, international trade has strong effects on income distribution. Who wins/loses? | The owners of a country's abundant factors gain from trade, but the owners of scarce factors lose. In theory, however, there are still gains from trade, in the limited sense that the winners could compensate the losers. |
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