This document discusses various economic theories and concepts related to international trade such as mercantilism, absolute advantage, comparative advantage, and free trade. It also covers topics like tariffs, quotas, the World Trade Organization (WTO), foreign direct investment (FDI), and different levels of economic integration including free trade areas, customs unions, common markets, and political/economic unions like the European Union (EU).

1. Global Test 2

2. Mercantilism
• Advocates that countries should
simultaneously encourage exports and
discourage imports

3. Adam Smith
• Theory of absolute advantage
• Explained why unrestricted free trade is
beneficial to a country
• Wealth of Nations
• 1776

4. Free Trade
• Where government doesn’t attempt to
influence through quotas or duties what its
citizens can buy from another country, or sell
to another country

5. David Ricardo
• Theory of comparative advantage

6. New Trade Theory
• In some cases countries specialize in the
production and export of particular products
because certain industries can only support a
limited number of firms

7. 0-sum game
• Situation in which an economic gain by one
country results in an economic loss by another
• Mercantilism assumed this was the case.
• You sell more than you buy, your country gains
and another country gets poorer. Doesn’t
work like that in reality

8. Positive – sum game
• Situation where all countries can benefit

9. Absolute Advantage
• When one country is more efficient at
producing something than any other country

10. Comparative Advantage
• A can either produce 20 cocoa or 15 rice,
while B can produce 5 cocoa or 7 rice.
• B has the comparative advantage for rice
• It is a measure of productivity

11. Samuelson Critique
• 20% cheaper groceries doesn’t necessarily
make up for wage losses in America

12. Heckscher-Ohlin theory
• Comparative advantage arises from
differences in national factor endowments,
not productivity
• Factor Endowments – extend to which a
country is endowed with resources like land,
labor, and capital

13. Leontief Paradox
• Goes against the H-O theory
• The U.S. is very high in capital, so according to
the H-O theory their exports should be very
capital intensive and imports more labor
intensive
• Yet in reality, U.S. imports are more capital
intensive than its exports

14. Product Life Cycle Theory
• United states starts as exporter of new
product because initial demand is not based
on price
• Later more people produce it, demand based
on price, production begins in countries that
can do it cheaper
• United states imports it from cheaper
countries

15. Economies of Scale
• Cost advantage associated with large-scale
production
• Spreading fixed costs by producing a ton of
units

16. First-Mover Advantages
• Economic and strategic advantages that
accrue to early entrants into an industry

17. Porters Diamond
• Said 4 factors determined comparative advantage
• Factor endowments – resources
• Demand Conditions – nature of home demand
• Relating and Supporting industries – related
industries. Stuff tends to be clustered
• Firm strategy, structure, and rivalry – how
companies are managed, organized, etc. Local
competition makes for better advantage globally

18. Tariff
• Tax on imports

19. Specific tariff
• Tariff levied as a fixed charge for each unit of
good imported

20. Ad Valorem Tariff
• Levied as a proportion of the value of an
imported good

21. Subsidies
• Government payment to a domestic producer

22. Import Quota
• Direct restriction on the number of a good
that may be imported into a country

23. Tariff Rate Quota
• Applying a lower tariff rate to imports within
the quota

24. Voluntary Export Restraint
• Quota imposed by the exporting country

25. Local Content Requirements
• A requirement that some specific fraction of a
good be produced domestically

26. Administrative Policies
• Rules designed to make it difficult for imports
to enter a country
• Example: japan required searching of
packages for pornography, making quick
deliveries impossible

27. Antidumping Policies
• Dumping – selling goods in a foreign market at
below their costs of production, or below fair
market value
• Antidumping Policies – designed to punish
foreign firms that engage in dumping and
protect domestic producers from unfair
foreign competition

28. Infant Industry Argument
• New industries should be temporarily
protected from foreign competition, until they
can hold their own in the global marketplace

29. Strategic Trade Policy
• Government should use subsidies to support
promising firms that are active in newly
emerging industries, to help them get first
mover advantage
• Second, when they are not the first, is to help
them overcome the first-mover advantages of
foreign countries

30. GATT
• Established 1947
• Objective – liberalize trade by eliminating
tariffs, subsidies, import quotas, etc

31. Uruguay Round
• Tariffs reduced
• Agricultural subsidies reduced
• Protection for intellectual property
• WTO created

32. WTO
• Polices the GATT agreement

33. Flow of FDI
• Amount of FDI undertaken over a given time
period

34. Stock of FDI
• Total accumulated value of foreign-owned
assets at a given time

35. Outflows of FDI
• Flow of FDI out of a country

36. Inflows of FDI
• Flows of FDI into a country

37. United states big part of FDI
• It had a large economy during the post-war
period and many large enterprises

38. Oligopolies
• Firms tend to imitate each other’s FDIs

39. Product Life Cycle
• At some point, businesses will use FDI for their
products when there is demand in other
countries

40. Free Market View of FDI
• FDI benefits both source country and host
country

41. Radical View of FDI
• Source country exploits host country for
profits

42. Pragmatic Nationalism
• FDI benefits host countries, but it comes at a
cost

43. Location-specific advantages
• Advantages that arise from utilizing resources
that are tied to a particular foreign location

44. Benefits of FDI to host country
• Resource transfer – they get stuff they may
not normally get (like technology)
• Employment – gives jobs to host country
• Balance of payments – gives country more
exports and less imports
• Increases global competition, reducing prices

45. Costs to host country
• Competitors to domestic companies
• Balance of accounts – hurts it if they import
most of their parts, rather than buy them in
the nation
• Fear of losing economic independence

46. Home Country Benefits
• Creates demand for home country exports
• Profits for companies
• Multinationals learn skills from their foreign
companies that can be used at home

47. Home country costs
• Reduced home country employment

48. FDI types
• Greenfield Investment – new facility
• Acquisition or merger with existing local firm

49. Gross Fixed Capital Formation
• Summarizes the total amount of capital
invested in factories, stores, office buildings,
and the like

50. Internalization Theory
• Argument that firms prefer FDI over licensing
to retain control over know-how,
manufacturing, marketing and strategy
• They wanna do it themselves

51. Licensing
• Firm licenses right to produce a product to a
foreign firm, and collects a royalty for it

52. Economic Integration
• Agreements among countries in a geographic
region to reduce, and ultimately remove,
tariffs and barriers to the free flow of goods
and services between eachother

53. European Union EU
• The countries dropped their trade borders to
eachother and adopted a single currency for
doing business

54. NAFTA
• North American Free Trade Agreement
• Free trade between Canda, USA, and Mexico

55. Levels of Economic Integration

56. Free Trade area
• No barriers to trade between countries in
agreement
• Individual countries still free to decide how to
deal with non-members
• NAFTA
• EFTA (european free trade association)

57. Customs Union
• Group of countries committed to removing all
barriers to flow of goods and services
• Pursuit of a common external trade policy

58. Common Market
• Everything customs union has, but also factors
of production can move freely between
members
• Labor and capital are free to move

59. Economic Union
• Same as those before, but requires common
currency, harmonization of tax rates, and
common monetary and fiscal policy
• EU is an economic union, though imperfect
since not all of its countries have adopted the
Euro

60. Political Union
• Where all of the above are true, and
government coordinates
• United States is an example

61. Trade Creation
• Trade created due to regional economic
integration, occurs when high-cost domestic
producers are replaced by foreign producers

62. Trade Diversion
• When low-cost foreign suppliers outside a free
trade area are replaced by higher-cost foreign
suppliers in a free trade area

63. EU
• Global Superpower due to high GDP
• 27 member states

64. Single European Act
• Committed members to establishing an
economic union
• Remove trade barriers
• Mutual product standards between countries
• Reduce restrictions on transporting between
countries

65. Euro Benefits
• Simpler between-country transactions
• Easier to compare prices across europe
• Long term efficiency of countries

66. Euro costs
• Nations lose control over monetary policy

67. Joining the EU
• Have to privatize state assets, deregulate
markets, restructure industries, and tame
inflation
• Enshrine EU laws into their own systems,
establish democratic governments, and
respect human rights

68. Optimal Currency Area
• Similarities in the underlying structure of
economic activity make it feasible to adopt a
single currency

69. European Council
• Most important EU authority
• Represents interests of member states
• Draft legislation from Commission can only
become law if the council agrees

70. European Commission
• Body responsible for proposing EU legislation,
implementing it, and monitoring compliance

71. European Parliament
• Elected EU body that consults on issues
proposed by the european commission

72. Court of Justice
• Supreme appeals court for EU law