Final Review Flashcards
Autarky
The situation of not engaging in international trade; self-sufficiency.
Factor of production
An input that exists as a stock providing services that contribute to production. The stock is not used up in production, although it may deteriorate with use, providing a smaller flow of services later. The major primary factors are labor, capital, human capital (or skilled labor), land, and sometimes natural resources.
Factor mobility/specificity
The degree to which a factor of production, such as labor or capital, is able to move, either among industries or among countries, in response to differences in its factor price, thus tending to eliminate such differences.
Opportunity cost
The cost of something in terms of opportunity foregone. The opportunity cost to a country of producing a unit more of a good, such as for export or to replace an import, is the quantity of some other good that could have been produced instead.
Comparative advantage
The ability to produce a good at lower cost, relative to other goods, compared to another country. In a Ricardian model, comparison is of unit labor requirements; more generally it is of relative autarky prices. With perfect competition and undistorted markets, countries tend to export goods in which they have comparative advantage. See also absolute advantage. Due to Ricardo (1815).
Ricardo-Viner Model
A specific factors model with a single specific factor in each industry and one mobile factor, named after two of the many who used this as the standard model of trade prior to the Heckscher-Ohlin Model. It extends the simple Ricardian Model by allowing the marginal product of labor to fall with output. It was revived by Jones (1971), Samuelson (1971), then merged with H-O by Mayer (1974), Mussa (1974), and Neary (1978).
Single factoral terms of trade
The purchasing power, in terms of the price of imports, Pm, of a country’s factors, thus accounting for both the net barter terms of trade and its own factor productivity, Ax, in production of exports: SFTT = NBTT*Ax = (Px/Pm)*Ax. Term introduced by Viner (1937).
Specific Factors Model
A model in which some or all factors are specific factors. The most common version is the Ricardo-Viner Model, with one specific factor (often capital or land) in each industry plus another factor (often labor) that is mobile between them. But an extreme form of the model, the Cairnes-Haberler Model, has all factors specific.
Specific Factor
A factor of production that is unable to move into or out of an industry. The term is used to describe factors that would not be of any use in other industries and also – more loosely – factors that could be used elsewhere but do not, in the short run, have the time or resources needed to move. See specific factors model. The term seems to come from Haberler (1937).
Heckscher-Ohlin Model
A model of international trade in which comparative advantage derives from differences in relative factor endowments across countries and differences in relative factor intensities across industries. Sometimes refers only to the textbook or 2x2x2 model, but more generally includes models with any numbers of factors, goods, and countries. Model was originally formulated by Heckscher (1919), fleshed out by Ohlin (1933), and refined by Samuelson (1948, 1949, 1953).
2x2x2 H-O Model
The Heckscher-Ohlin Model with 2 factors, 2 goods, and 2 countries.
Factor Endowment
The quantity of a primary factor present in a country. See endowment.
Factor Price Equalization
The tendency for trade to cause factor prices in different countries to become identical. Ohlin (1933) argued that trade would bring factor prices closer together. Samuelson (1948, 1949) showed formally the circumstances under which they would actually become equal.
Factor Abundance
The abundance or scarcity of a primary factor of production. Because, in the short run at least, the supplies of primary factors are more or less fixed, this can be taken as given for determining much about a country’s trade and other economic variables. Fundamental to the H-O Model.
Factor Intensity
The relative importance of one factor versus others in production in an industry, usually compared across industries. Most commonly defined by ratios of factor quantities employed at common factor prices, but sometimes by factor shares or by marginal rates of substitution between factors.
Median Voter Theorem
The median voter theorem, in its simplest form, is formulated within the framework of a unidimensional, spatial model. The theorem says that the opinion held by the median voter will become the decision, if the simple majority rule is used. The median voter is the voter having as many voters on her one side of the scale as on her other side. The single peakedness condition, as defined above, is a condition for the truth of the theorem.
single peakedness condition
Assumption that each member of the society ranks candidates, or other political proposals, lower the farther away, in either direction, they are from his or her own position on the scale. This means, for example, that the voter V1 ranks C2 before C1 and also that the same voter ranks C3 before C4, and C4 before C5. When this assumption is fulfilled it is easy to see that each voter’s preferences can be represented by a curve like a mountain with a top at the voter’s own position and slopes going steadily downward in both directions from that position.
Riker Theorem, Median Voter
The theorem says (Riker, 1962) that a political coalition tends to be as small as possible, as long as it is winning. To be “winning” here essentially means to be “able to dictate the outcome”.
Prisoners’ Dilemma
A strategic interaction in which two players both gain individually by not cooperating, but leading to a Nash equilibrium in which both are worse off than if they cooperated. Important especially for explaining why countries may choose protection even though all lose as a result. See tariff-and-retaliation game.
Tariff and Retaliation Game
The game of countries setting tariffs knowing that by doing so they alter the terms of trade to their own advantage. This is one very specific form of trade war.
Improve the Terms of Trade
To increase the terms of trade; that is, to increase the relative price of exports compared to imports. Because it represents an increase in what the country gets in return for what it gives up, this is associated with an improvement in the country’s welfare, although whether that actually occurs depends on the reason prices change.
Pareto optimal
Having the property that no Pareto-improving (making no one worse off and making at least one person better off) change is possible.
Nash equilibrium
An equilibrium in game theory in which each player’s action or strategy is optimal given the actions or strategies of the other players. E.g., in a tariff-and-retaliation game, with each country able to improve its terms of trade with a tariff, zero tariffs are not Nash, since each can do better by raising its tariff. A Nash equilibrium, with positive tariffs, is likely to be inferior to free trade for both.
Collective action problem
The difficulty of getting a group to act when members benefit if others act, but incur a net cost if they act themselves. (Mancur Olson)
Mancur Olson on Collective Action Problesm
“Indeed unless the number of individuals in a group is quite small, or unless there is coercion or some other special device to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common or group interests.”
Selective incentives
only a benefit reserved strictly for group members will motivate one to join and contribute to the group
Embedded liberalism
This connotes a commitment to free markets tempered by a broader commitment to social welfare and full employment (John Ruggie). Monetary policy is a handmaiden to these loftier objectives, not an end in itself.
Numeraire good
The unit in which prices are measured. This may be a currency, but in real models, such as most trade models, the numeraire is usually one of the goods, whose price is then set at one. The numeraire can also be defined implicitly by, for example, the requirement that prices sum to some constant.
Grossman-Helpman Model
Politicians’ decisions are based on: Total Welfare = (relative weight on aggregate welfare)*∑V(p, incomes before political contributions) + ∑Contributions
Logrolling
The exchange of political favors, especially among legislators who agree to support each others’ initiatives. Logrolling contributed importantly to the Smoot-Hawley Tariff.
Smoot-Hawley Tariff
The Tariff Act of 1930, this raised average U.S. tariffs on dutiable imports to 53% and provoked retaliation by other countries.
Strategic trade theory argument for protection
In an example of strategic trade policy, the use of a tariff to extract monopoly profits from a foreign monopolist, or to shift profit from foreign to domestic competitors in an international oligopoly. The monopoly case seems to have originated with Katrak (1977), but the classic treatment of the larger issue is Brander and Spencer (1984).
Strategic trade policy
The use of trade policies, including tariffs, subsidies, and even export subsidies, in a context of imperfect competition and/or increasing returns to scale to alter the outcome of international competition in a country’s favor, usually by allowing its firms to capture a larger share of industry profits. The seminal contribution was Brander and Spencer (1981).
Upstream/downstream externalities
The (second best) argument that an industry should be protected because it generates positive externalities for other industries or consumers.
Infant industry protection
Protection of a newly established domestic industry that is less productive than foreign producers. If productivity will rise with experience enough to pass Mill’s and Bastable’s tests, there is a second-best argument for protection. The term is very old, but a classic treatment may be found in Baldwin (1969).
Tests for infant industry protection to be welfare-improving
- Mill’s test = the protected industry become, over time, able to compete internationally without protection. 2. Bastable’s test = the protected industry be able to pay back an amount equal to the national losses during the period of protection.
