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ECON 4040: Study Guide

consumer surplus
difference between what consumers are willing to pay for a given quantity and the price they must pay; area above the market price and below the demand curve
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producer surplus
difference between what producers are willing to accept for a given quantity and the price they are able to receive for that quantity; the area below the market price and above the supply curve
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factor proportions approach
examines two nations that produce two identical goods using two nations that produce two identical goods using two identical factors of production, or inputs, and the same production tech. The two inputs (capital and labor), can move freely from industry to industry, but cannot move from one nation to another. Goods can move freely across nations, and residents of the two nations have identical tastes for each of the two goods.
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Heckscher-Ohlin theory of trade
a nation's residents will export goods and services that use relatively intensively the nation's relatively abundant factor; the nation's residents will import goods and services that use relatively intensively the nation's relatively scarce factor. The nation that is relatively labor abundant will have ca in production of relatively labor-intensive good, while lation relatively capital abundant will have ca in production of relatively capital-intensive good.
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Leontief Paradox
contradicted the Heckscher-Ohlin theorem, in that it indicated that imports of the US, a relatively capital abundant nation, were relatively more capital intensive than the exports of the United States.
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Factor Proportions Approach
allows for differing nations to have different tastes for goods and services. Disaggregate labor and capital into more specific categories, thereby increasing the number of factors considered (workers: skilled and unskilled), allow that some factors move from one nation to another
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Factor Price Equalization Theorem
uninterrupted trade will lead to the global equalization of all factor prices across nations. These factor prices include wages paid to resource owners for their labor, interest paid to resource owners for use of their capital, and rental payments to resource owners for the use of their land.
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Stolper-Samuelson theorem
in the context of the factor proportions model, free trade raises earnings of the nation's relatively abundant factor and lowers the earnings of the relatively scarce factor (winners and losers; owners of abundant factors support free trade, scare resources oppose)
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Magnification Principle
change in the price of the factor is greater than the change in the price of the good that uses the factor relatively intensively in its production process
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internationalization of production
firms can outsource other firms to complete other stages of production
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value added
difference between the value of a good or service and the cost of intermediate goods for that particular stage of production
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Rybczynski theorem
an expansion of a nation's endowment of a particular factor of production will lead to an increase in the production of the good that uses that factor intensively in its production process and a decrease in the production of other good
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forward shifted tax
if consumer pays the tax in the form of a higher price
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backward shifted tax
if producer pays the tax in the form of lower revenue per unit
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small-country tariff
causes market price to rise by full amount of the tariff-entire amount of tariff is shifted forward to consumers. DWL always occurs.
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large-country tariff
increase in market price and a decrease in the price in the global market, part of the tariff is forward shifted to domestic consumers and part is backward shifted to foreign producers. DWL always occurs
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import quota
policy that restricts the quantity of imports
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absolute quota
quantitative restriction that limits the amount of a product that can enter a country
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tariff-rate quota
allows a specified quantity to enter at a reduced tariff rate. Any quantity above that mount is subject to a higher tariff rate
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voluntary export restraint (VER)
informal agreement between policymakers in two nations to restrict the exports of a good from one nation to the other; establishes an informal quota, so its economic effects are similar to effects of quota; typically don't come under jurisdiction of regional and multilateral trade regulators
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export subsidy
payment by government to domestic firm for exporting its goods or services
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dumping
situation in which a firm sells its output to foreign consumers at a price that is less than what the firm charges its domestic consumers, or when a foreign firm prices its exports below their cost of production
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contervailing duty
tax on imported goods and services designed to offset the domestic price effect of foreign export policies
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first-best policy
deals directly with the problem the policy is designed to remedy
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second-best policies
indirectly deal with problems that policymakers seek to remedy (trade barriers)
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intraindustry trade
occurs when countries trade essentially the same goods with one another ex: trade of autos/auto parts between US and China= 1- {x-m}/x+m; occurs because of high transportation costs, services produced jointly with another traded product,
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interindustry trade
occurs when a country either exports or imports goods in different industries
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preferential trade arrangement
when a nation grants partial trade preferences to one or more trading partners
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free-trade area
trading arrangement that removes all barriers to trade among participating nations but that allows each nation to retain its own restrictions on trade with countries outside the free-trade area
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customs union
trading arrangement that entails eliminating barriers to trade among participating nations and setting common barriers to trade with other countries outside the group
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common market
trading arrangement under which member nations remove all barriers to trade among their group, erect barriers to trade with countries outside the group, and permit unhindered movement of factors of production within the group
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trade creation
additional amount of international trade resulting from trade preferences that a nation grants to a trading partner
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trade diversion
shift in international trade caused by one nation giving trade preferences to another which can cause trade with a third country to decline
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trade deflection
movement of goods or components of goods from a country outside a trading arrangement to one within such an arrangement so that the seller can benefit from trading preferences within the arrangement
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rules of origin
regulations governing conditions under which products are eligible for trading preferences under trade agreements
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multilateralism
approach to achieving freer international trade via a wide interplay among many of the world's nations, with an aim toward inducing each country to treat others equally in trading arrangements
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most favored nation
one that receives reductions in trade barriers to promote open international trade
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GATT
international agreement among more than 140 nations about rules governing cross-border trade in goods
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WTO
multinational organization that oversees multilateral trade negotiations and adjudicates trade disputes
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imperfect competition
a firm is able to influence price by changing the quantity of goods offered for sale. It can occur under monopolistic competition, oligopoly, and monopoly
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internal economy of scale
when an increase in a firm's output causes a decrease in its average cost. This often occurs in firms that use a lot of capital relative to labor or where there are high fixed costs for R and D
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external economy of scale
when a firm's average costs fall as the total industry output rises. A larger industry may mean larger and less expensive suppliers or a bigger pool of labor
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production possibilities
all possible combinations of total output of goods and services that residents of a nation can produce given currently available technology and resources.
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Opportunity Cost
When the nation's residents raise their production of one item, they must forgo producing some amount of another good or service. This opportunity cost increases as the nation's residents produce more of the particular item
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absolute advantage
when residents of a nation can produce more of that good or service with a given amount of resources as compared with other nations.
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comparative advantage
when a nation can produce additional units of a good or service at a lower cost than in other countries. This gives residents of a country with higher costs of producing additional units of the good or service, an incentive to trade with the nation that has a comparative advantage.
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