International Economics

Suppose country A had been traditionally enjoying a comparative advantage in the production of good X. As a result most of the large firms manufacturing and exporting good X were concentrated in country A. However, recently it has been observed that the comparative advantage in the production of good X has shifted to country B owing better factor availability and lower input prices. Some new firms are contemplating to start operating in country B.
The output level of the new firms in country B should be large enough to enable them to enjoy scale economies.
When the average cost of a typical firm declines as the output of the industry within a geographic area increases it is referred to as
external scale economies.
If a small country imposes a tariff on imported motorcycles:
the surplus of the domestic producers of motorcycles will increase, but the surplus of the domestic consumers will decline.
Which of the following is an impact of tariffs on the country imposing them?
The domestic consumers pay a higher price for the imported products.
In oligopoly pricing, firms are caught in a situation called prisoner's dilemma when they:
compete aggressively and earn low profits.
External scale economies are more likely to arise in an industry:
in which firms readily share technology improvements.
A large amount of intra-industry trade is not compatible with the comparative-advantage theory of trade.
Which of the following has overseen the global rules of government policy toward international trade since 1995?
The World Trade Organization
When firm X doubled its output, it was found that its cost per unit declined by 10%. It can be concluded that:
the firm was enjoying internal scale economies.
In Heckscher-Ohlin theory, differences in _____ across countries are considered to be the basis for comparative advantage
factor endowments
Which of the following statements is NOT correct?
Tariffs hurt producers and help consumers in the country imposing the tariff.
_____ is a market structure in which a large number of firms compete vigorously with each other in producing and selling different varieties of a basic product.
Monopolistic competition
The Heckscher-Ohlin theory suggests that research and development activity is most likely to be concentrated in countries which:
are skilled-labor-abundant.
Which of the following refers to individual efforts by businesses that focus on improvements in production technologies for existing products and on new production technologies for new or improved products?
Research and development
Country A is a large country that imports good-quality processed chicken from country B. Suddenly, country A's government decides to impose a tariff on this import. Who among the following will be adversely affected by this policy?
Producers of chicken in country B
Which of the following refers to a two-way trade in which a country both exports and imports the same or very similar products?
Intra-industry trade
Which of the following correctly identifies the impact of tariffs on the producers of import-competing products in the imposing country?
They can expand their production and sales.
New technology created through research and development activities in the United States will only be used by firms in the United States.
If a small country imposes a tariff on imported motorcycles, the world price of motorcycles will _____ and the domestic price of motorcycles will ____
remain constant; rise
A significant gain from trade in an oligopolistic market results from the increase in the number of product varieties that trade brings.
When external scale economies exist in an industry, new trade opportunities will cause:
the consumers in both the exporting and the importing countries to gain.
For a small country, the sum of the production and the consumption effects indicate the net loss in economic welfare due to the imposition of a tariff.
Both the Heckscher-Ohlin theory and comparative advantage based on technological differences assume that the techniques of production in various countries do not change over time.
A(n) ______ is a tax on imports that is stipulated as a money amount per unit.
specific tariff

The figure given above shows the market for shoes in the U.S. The domestic price line with tariff lies above the international price line. Dd and Sd are the domestic demand and supply curves of shoes respectively.
increases; a
Suppose the global market for personal computers is monopolistically competitive. If a country engages in a two-way trade in personal computers, such trade is usually based on ____.
product differentiation
The Heckscher-Ohlin theory predicts that trade between similar industrialized countries should:
be rather limited in volume.
Technology-based comparative advantage:
can help explain how the United States went from being a net exporter of steel to being a net importer of steel.
Which of the following can best explain the clustering of some industries, such as banking and finance in New York City and high-technology computer production in Silicon Valley?
External Economies of Scale
When a tariff is imposed on an imported good, the prices of the similar products produced within the country also increases.

The figure given above shows the market for shoes in the U.S. The domestic price line with tariff lies above the international price line. Dd and Sd are the domestic demand and supply curves of shoes respectively.

In Figure 8.1, the tariff revenue of the U.S. government is shown by area ____.
When external scale economies exist in an industry, which of the following groups is most likely to be left worse off after the opening of free trade?
Producers in the importing country
In an oligopoly market, firms vigorously compete with each other by selling different varieties of the same product.
In intra-industry trade, an exporting firm may be forced to sell its product at a lower price than in the absence of trade.
constant returns to scale
input use and total cost rise in the same proportion as output increases.
Because total cost and output go up by the same proportion, average cost (cost divided by the number of units produced) is constant (or steady).
scale economies
output quantity goes up by a larger proportion than does total cost, as output increases.
If output quantity expands faster than total cost increases, then the average cost of producing a unit of output decreases as output increases.
internal economies of scale
the size of the individual firm matters, i.e. larger firms have a cost advantage over smaller firms.
Scale economies that are internal to the firm can drive an industry away from perfect competition, because they drive individual firms to be larger than the (very) small firms that populate perfectly competitive industries
monopolistic competition
If scale economies are modest or moderate, there is room in the industry for a large number of firms. it is a mild form of imperfect competition that exists, where a large number of firms compete vigorously with each other in producing and selling varieties of the basic product.
If a few large firms dominate the global industry, perhaps because of substantial scale economies
External scale economies
are based on the size of an entire industry within a specific geographic area.
The average cost of the typical firm producing the product in this area declines as the output of the industry (all the local firms producing this product) within the area is larger
a type of external economy of scale.Clustering of the production of some products in specific geographic areas due to a specialized supply of resources such as labor, equipment and support services
knowledge spillover
Greater knowledge spillover among the firms in the cluster
Net trade
is the difference between exports and imports of the industry's product(s).
Inter-industry trade:
a country exports products in some industries and imports products in other industries. For each industry, net trade is either (almost) all exports or (almost) all imports.
Intra-industry trade (IIT):
two-way trade in which a country both exports and imports the same or very similar products (products in the same industry).

IIT is the part of total trade in the product (exports plus imports) that is not net trade
(IIT) = (X + M) - │X - M │
where X is the value of exports and M is the value of imports of the product
Intra-industry trade for a product is equivalent to twice the value of the smaller of exports or imports.
it is more important in manufactured products than agriculture

Some measured IIT reflects trade driven by comparative advantage
Product differentiation,
Transportation cost, and geographical location
Product differentiation:
many different types and varieties of a product may exits
Monopolistic competition
Monopolistic competition describes an industry with the following characteristics:
A large number of firms each producing a variant of a product that consumers view as unique. The product differentiation may be based on branding, physical characteristics, quality, effectiveness, or anything else that matters to consumers.
Each firm has some degree of monopoly power based on its established production of its unique variety.
There is ease of entry and exit of firms in the long run
agglomeration economies
External Scale Economies (also called agglomeration economies) exist when the expansion of the entire industry's production within a geographic area lowers the long-run average cost for each firm in the industry in the area.
Production tends to be concentrated in a small number of locations, and countries with these locations export the product.
Balanced Growth
In balanced growth, the country's production possibilities curve (PPC) shifts out proportionately so the its relative shape is the same
Biased Growth
In biased growth, the expansion favors proportionately more of one of the products, so that the PPC will skewed toward the faster-growing product.
Rybczynski Theorem
In a two-good world, and assuming that product prices are constant, growth in the country's endowment of one factor of production, with the other factor unchanged, has two results:
An increase in the output of the good that uses the growing factor intensively
A decrease in the output of the other good
Small country case:
If the country is small (i.e. a price-taker in world trade), then its trade has no impact on the international price ratio ( the country's terms of trade, TOT)
Large country case:
If a country is large, a change in willingness to trade affects the equilibrium international price ratio. This change could either improve the country's TOT, or deteriorate the TOT.
Immiserizing growth
Growth that expands the country's willingness to trade can result in such a large decline in the country's terms of trade that the country is worse off.
Technology and Trade
Another basis for comparative advantage can arise over time as technological changes occur at different rates in different sectors and countries.
In some ways technology-based explanation is an alternative that competes with the H-O model.
In other ways technology differences can be consistent with an H-O view of the world.
product cycle hypothesis
, first advanced by Raymond Vernon:
When a product is first invented, the major demand is mostly in high-income countries, and the product still must be perfected by using additional R&D and local production.
Over time, the product and its production technology become more standardized and familiar. Factor intensity in production tends to shift away from skilled labor toward less skilled labor.
The technology diffuses and production locations shift into other countries, eventually into developing countries with abundant less-skilled workers.
Openness to Trade Affects Growth
Openness to international trade can enhance the technology that a country can use by facilitating the diffusion of foreign-based technology into the country and by accelerating the domestic development of the technology
The growth rate for the country (and world as a whole) increases in the long run
is a tax on importing a good or service into a country.
A tariff almost always lowers world well-being.
A tariff usually lowers the well-being of each nation,
including the nation imposing the tariff.
The exception is the "nationally optimal" tariff. When a nation can affect the prices at which it trades with foreigners, it can gain from its own tariff. (The world as a whole loses, however.)
A tariff absolutely helps those groups tied closely to the production of import substitutes, even when the tariff is bad for the nation as a whole
Specific Tariff
is stipulated as a money amount per unit of import, such as dollars per ton of steel bars, or dollars per eight-cylinder two-door sports car.
Ad-valorem tariff
is a percentage of the estimated market value of the imported good when it reaches the importing country.
Compound tariff
is a combination of specific and ad valorem tariffs.
One-dollar, one-vote metric
Every dollar of gain or loss is just as important as every other dollar of gain or loss, regardless of who the gainers or losers are.
Consumption effect
of the tariff shows the loss to the consumers in the importing nation based on the reduction in their total consumption (area d in the diagram).
Production effect
of the tariff is the amount by which the cost of drawing domestic resources away from other uses exceeds the savings from not paying foreigners to buy extra units (area b in the diagram).
the effective rate of protection
the percentage by which the entire set of a nation's trade barriers raises the industry's value added per unit of output
nationally optimal tariff
is the tariff that creates the largest net gain [area e −area (b + d)] for the country imposing it, assuming the rest of the world is passive.
The optimal tariff rate, as a fraction of the price paid to foreigners, equals the reciprocal of the price elasticity of foreign supply of home country's imports.
Danger: Rest of world is worse off. Risk of retaliation by foreign country governments
three key characteristics of monopolistically competitive market for small compact cars with no trade in the U.S. are:
Differentiation: The price that a firm can charge decreases as the number of models available in the market increases. The price curve (P) is downward sloping
Internal scale economies: Crowding of models reduces the ability for the firm to achieve scale economies. The unit cost curve (UC): an upward sloping curve
Ease of entry and exit from market: In the long
run, a typical firm earns zero economic profits on
its model
If the world is now open to trade
1. Domestic automobile company, for example
Ford, can export their models to foreign
2. Foreign automakers in the rest of the world
can export their models to the United States
Gains from Trade
Unlike the H-O model, the opening up of trade has little impact on the domestic distribution of factor incomes if the additional trade is intra-industry.
Gains from greater variety can offset any losses in factor income resulting from inter-industry shifts in production that do occur.
Global Oligopoly
In an oligopoly market a small number of firms dominate total production of a product.
Boeing and Airbus account for nearly all the world's production of large commercial aircrafts
Sony, Nintendo, and Microsoft design and sell most of the world's video game consoles.
Companhia Vale de Rio Doce (CVRD), Rio Tinto, and BHP Billiton mine more than half of the world's iron ore
Oligopoly, Scale Economies, and Trade
If substantial scale economies exist over a large range of output, then production of a product tends to be concentrated in a few large facilities in a few countries to take advantage of the cost-reducing benefits of the scale economies.
Countries that have these production locations export the product.
Other countries import the product.
Oligopoly Pricing
Each firm in an oligopoly is competing with a few other large firms, so any action it takes will provoke reactions from rivals
Prisoner's dilemma
If the oligopoly firms can restrain their price rivalry, then the exporting countries benefit from the higher export prices and better terms of trade.
Monopsony power
a nation has a large enough share of the world market for one of its imports that changes in the country's import buying can noticeably affect the world price of the product.
If the country's demand for imports increases, it terms of trade deteriorate. If its import demand decreases, its terms of trade improve.