International Trade and Money summary Questions and Answers 2023

1. Outline the main characteristics of the mercantilist view of international trade ; - -• Export as much as possible, import as little as possible • Mercantilism is a zero-sum game = not everyone can benefit • Someone's export = else's import • Japan and China often accused of neo-Mercantilism -2. Explain the principle of absolute advantage; - -The ability of a country/individual/ company A to produce certain product cheaper (at lower cost per unit) than country/individual/ company B -3. Describe, using a simple example, the principle of Comparative Advantage; - -The less efficient country (UK) should specialize in and export the good in which it is relatively less inefficient (where its absolute disadvantage is the least) The more efficient country (USA) should specialize in and export the good in which it is relatively more efficient (where its absolute advantage is the greatest) -4. Explain additional factors (additional to comparative advantage) that might support arguments for free trade; - -Companies will become more competitive Motivation to keep up with the competition Make use of surplus of raw materials -5. State the basic principle behind the factor proportions model of international trade - -every country has naturally given advantages • If a country has a lot of capital then its advantage will be in capital intensive goods = export a capital intensive good like trains • If a country is labor abundant, export labor intensive goods such as textiles -6. State briefly the Stolper-Samuelson and Factor Price Equalization theorems - -Stolper samuleson theorem shows that there is a positive relationship between changes in prices of output and the price of the factor used intensively in producing it. It demonstrates that when the relative prices for labor-intensive goods fall, real wages decline in that sector, and the returns to other factors increase, resulting in a redistribution effect.