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| A way for a country without comparative advantage to have time to gain an advantage in the production of a good is for the country to subsidize or sponsor the production of that good. |
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| Tax placed upon imported products |
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| Why do countries impose tariffs instead of accepting free trade? |
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| Consumers within the country will want to purchase products from their own country because they will pay Pw not Pw+t |
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| Why do countries provide export subsidies instead of accepting the benefits of free trade? |
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| If a subsidy is big enough it can discriminate against those who might have comparative advantage. |
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| Most Favored Nation- has to do with tariffs. A guarantee that a country's exporters will pay tariffs no higher than that of the nation that pays the lowest. |
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| Effects of a Tariff: home, foreign, world economies. Product: wheat |
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| If home has a tariff on wheat the foreign wheat producers will not export their wheat unless it exceeds the foreign price by at least the cost of the tariff. If it does not exceed the cost of the tariff than foreign will not export it's wheat to home and there will be an excess demand for wheat in home and an excess supply in foreign. Thus, the price of wheat will rise in home and fall in foreign until the price difference equals the cost of the tariff. |
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| One of the four critical theorems: It states that a country will export goods that use it's abundant factors of production intensively. It will import those goods that use the scarce factor of production. |
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| 2x2x2 It assumes that both countries have the same propensity to consume, have the same technology, have only two factors of production: capital and labor, two goods, and two countries. |
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| Factor Price Equalization Theorem |
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| If two countries move from autarky to free trade, wages will fall in the capital abundant country and rise in the labor abundant country, while rental rates will rise in capital abundant country and fall in labor abundant country |
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| Stolper–Samuelson theorem |
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| A rise in the relative price of a good will lead to a rise in the return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the return to the other factor. |
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| At constant prices, an increase in one factor of production will lead to a more than proportional increase in production of at factors good. This leads to the production point being lower on the PPF instead of directly across. |
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| Rybczynski Diagram Curved |
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Stolper–Samuelson diagram
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Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry. Subsidies can be used to increase production and exports of goods in which that country does not have comparative advantage. |
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| A tariff that is designed to maximize a large country's benefits from trade by improving its terms of trade. Optimum only for the country imposing the tariff, not for the world. |
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Infant industry argument is an economic rationale for trade protectionism. The argument is that a government should help industries that are just starting out so that they can compete in the long run with the more established industries. |
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| Economies of Scale diagram |
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| As the scale of outputs increase, the average per unit cost goes down. As GM builds bigger and bigger factories, the average cost of producing a car is less and less. |
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| Labor is mobile among industries but capital is immobile in the short run. An increase of the price of the exportable increases wage. |
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| The pattern of international trade is determined by factors of endowment (land, labor, capital). It predicts that a country will export the abundant factor of production and import the scarce factor of production. |
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| Law of Diminishing Returns |
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First we think of trade as an indirect means of production. Home "produces" its scarce factor of production by trading with a country that has comparative advantage in that factor.
The second benefit is how trade increases each country's ability to consume. Instead of having the production possibilities be the same as the consumption possibilities, trade has allowed increased consumption of both goods produced and both countries are better off. |
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Deadweight losses are the inevitable costs incurred when a country imposes a tariff. Depending on whether the country is large or small determines how the losses are distributed.
A large country can distribute some of the deadweight losses to its trading partners who, if they are small cannot do anything but accept those costs; if the country is large however, they can retaliate by imposing a tariff against the first country. The result is negative for both countries.
When a small country imposes a tariff, it has no way to place any of the deadweight losses upon its larger trading partners who would just find someone else to trade with. The costs are therefore placed completely on the importing country's consumers. |
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| Ricardian Model: Theory of Comparative Advantage |
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A country is said to have a comparative advantage in the production of a good (say, cloth) if it can produce it at a lower opportunity cost than another country. The opportunity cost of cloth production is defined as the amount of wine that must be given up in order to produce one more unit of cloth. |
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| Production Possibilities Frontier Equation |
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When two individuals make a voluntary exchange, they will both benefit. This is sometimes calls a positive-sum game. |
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