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International Agricultural Trade - Exam 1 (Ch 2,3,4,5)

Terms in this set (41)

Absolute advantage means that
a country produces more of a good given the amount of resources required.
The United States has a comparative advantage in producing corn relative to the United Kingdom if opportunity cost of producing corn in the United States is
Less than that of the United Kingdom.
Pre-trade Price Ratio
(Pt/Pc)
The terms of trade are defined as
The ratio of its export commodity's price to its import commodity's price (Px/Pm).
The production possibilities frontier (PPF) curve shows
the different combinations of two goods that a country can export/produce by using all of its
The consumption equilibrium is determined by
the intersection between the CPF and a social indifference curve.
A social indifference curve shows
the different combinations of goods that a nation can consume and get the same level of social utility.
The production function for commodity X based on two factors of production is given as
Qx = fx(Kx, Lx)
The production function for commodity Y based on two factors of production is given as
Qy = fx(Ky, Ly)
A concave toward the origin production possibilities frontier, given that there are only capital and labor as inputs, implies that
capital and labor are not used equally in the production of X and Y.
Given the production functions for commodities X and Y and the market equilibrium for capital and labor, we derive the production possibilities frontier
by finding the maximum output of X when all the available labor and capital are used in its production and by finding the maximum output of Y when all the available labor and capital are used in its production.
Every point on the production possibilities frontier, given that X and Y are the two commodities produced, is
Efficient and represent the maximum of X and Y that the economy can produce give the available resources.
The opportunity cost of X in terms of Y is
also called the marginal rate of transformation (MRT) of X for Y
Autarky means that an economy is closed, that is
the economy does not do any trade
Assuming that the price of X is Px and the price of Y is Py, we can define the value of the economy's total output as
V = PxQx + PyQy
The gains from trade can be represented by
two parts; one is the consumption gain or international exchange gain , and the other is the production gain or specialization gain.
Assume that the opportunity cost of textiles in terms of corn is less in the UK relative to that of the U.S, and that the opportunity cost of corn in terms of textiles is less in the U.S. than that of the UK. That is, (Pt/Pc)^us > (Pt/Pc)^uk, then
the U.S. has comparative advantage in corn production, and with trade, it exports corn to the UK.
The offer curve determines the amount of the
export commodity a country is willing to offer to its trade partner in exchange for different amounts of its import commodity.
The factor endowment model explains trade patterns that happens among countries when
countries focus on the production of the commodity that use the factors that they have in relatively higher proportions and export that commodity.
The Heckscher-Ohlin theorem explains
comparative advantage based on factor endowments.
Given the Heckscher-Ohlin theorem that the United States has a higher level of capital endowment, the United States
should focus on the production of capital intensive goods and export them, but import the goods in which it does not have comparative advantage.
One assumption of the Heckscher-Ohlin model is that
the factors of production are homogeneous.
Given the assumptions of the Heckscher-Ohlin model
Specialization in producing each commodity will continue until commodity prices are the same in both countries.
If the production of commodity Y uses more labor per units of capital relative to the production of commodity X
then commodity Y is labor-intensive.
Country A is capital abundant if
it has a higher capital to labor ratio than that of country B; (K/L)^a > (K/L)^b
Country A is labor abundant relative to country B
if the wage to interest rate ratio is lower than that of country B; (w/r)^a < (w/r)
The Heckscher-Olin Samuelson (H-O-S) theorem states that international trade will equalize the relative and absolute returns to homogeneous factors across countries. That is,
the wage level for the same type of labor will be the same across countries as well as the interest rate for the same type of capital.
There is income redistribution between the two countries because of the equalization of factor prices through international trade. That is,
in the labor abundant country, the real wage increases while the real returns to capital decreases.
The Leontief paradox is based on a study that found that, even the Unites States is capital abundant,
it imported capital intensive goods and exported labor intensive goods.
Factor intensity reversal means that
if two factors, capital and labor, are highly substitutable in the production of a commodity, then good X could be labor intensive in the labor abundant country as well as capital intensive in the capital intensive country.
The new trade theory relaxes the assumptions of constant return to scale and perfect competition. That is, it allows
for economies of scale and imperfect competition
If the amount of labor increases by 10%,
so that output of corn increases by more than 10%, then we have increasing returns to scale.
Specialization in the production of a product, given increasing economies of scale,
will cause output to *increase* by a *greater* proportion than the increasegreatere output to *increase* by a *greater* proportion than the increase in a given input.
External economies of scale depend on the size of the industry. That is,
external economies of scale refer to the situation in which the firm does not have control over some factors that affect production efficiency.
It can be assumed that agricultural producers are price takers. That is,
agricultural producers are small firms that do not have market power or that cannot change the product price.
Many agribusiness firms are price makers. This is explained by
imperfect competition which represents fewer and larger firms that are capable of affecting the price of the product.
Monopolistic competition represents
a larger number of relatively smaller firms that sell differentiated products and also have market power.
Inter-industry trade is based on comparative advantage
due to factor endowments and technology differences.
Intra-industry trade can be the result of other factors different from comparative advantage
and such factors include economies of scale and imperfect competition.
Imperfect competition can create trade because
given increasing returns to scale, countries can engage in trade even they may have identical production technologies, tastes, and resources.
Protectionist trade policies can be used
to help developing industries that are considered important to the economic growth and welfare of a country.
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