1) Absolute advantage means that a country can manufacture a good at lower cost, in terms of real resources, than another country. However, having an absolute advantage is neither necessary nor sufficient condition to export a good. Trade becomes beneficial if one country has a lower relative cost of manufacturing a good. The opportunity cost to a country of manufacturing a unit more of a good, e. g. for trade purposes, is the quantity of some other good that could have been manufactured instead.
Countries A and B gain benefit from specializing and engaging in international trade if their production follows the production possibilities curve, which reflects the trade-off between two goods (opportunity cost). All the options situated under the production possibilities frontier reflect inefficient production choices; all the options lying outside the frontier are impossible to implement. 2) The Heckscher-Ohlin model states that a country exports products that are manufactured using its abundant factor of production and imports products that are manufactured using its scarce factor.
The assumptions of the model are as follows: (i) The two countries have the same production technology; (ii) Labor and capital mobility within countries takes place at zero cost; (iii) Labor and capital mobility between
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The U. S. having more advanced technologies than its trade partners wants to take advantage of that. The second reason is connected to the reversal of factor intensities. Same product can be capital intensive in one country and labor intensive in another country. For example, American agriculture is capital intensive, and in India it is labor intensive. While capital is cheaper in U. S. , agricultural sector is among those groups that oppose free trade vociferously.
3) Economies of scale are observed when the cost per unit decrease as output grows. Internal economies of scale explain the lower unit costs one company can achieve by growing in size itself. External economies of scale explain the lower unit costs when entire industry growing in size. ‘New theories of trade’ argue that sometimes it is justified to disengage from international trade and implement protectionist measures, despite the fact that the benefits of external economies of scales might be lost in the short-term perspective.
Yet in the longer run, protection of infant industries might make them competitive on the international market after the economy is opened up. The most commonly cited example is the one of Japanese automotive industry after the World War II that benefited immensely from protectionist measures. Definitions: 1) Equalization of Factor: A scenario under which the prices of factors of production in different countries are driven towards equality if barriers to trade are non-existent.
2) The Product-cycle Theory: The theory that holds that a new product, which initially can be manufactured only in the country where it was developed, eventually becomes standardized and more available, and finally can be produced in other countries and exported back to the country were it was developed. 3) Leontief Paradox: The discovery that that the US imports featured a higher ratio of capital to labor than it exports; this contradicted the Heckscher-Ohlin Theory that would predict that U. S.
exports would be capital intensive, since a country’s exports were thought to reflect the commodity most abundant in that country. 4) Terms of Trade: The relative price of a country’s exports compared to its imports on world markets. 5) Mercantilist: An attribute of an economic theory of the 16th and 17th centuries that held that international trade serves to increase a country’s financial wealth, especially of gold and foreign currency; exports were perceived as desirable and imports as undesirable unless they resulted in an increase in exports.