economics

Review for the First Exam

The Integrated World

· A shift from a world with isolated non-intervening countries to one where countries are integrated in terms of economics, politics, technology and culture

· Economic integration through different flows

· The process of economic integration as economic globalization

· Different waves of Globalization

· Drivers of Globalization in each different phase

· Compositional changes in goods flows over the phases of globalization

· Changes in investment flows over different phases of globalization

· Changes in labor flows over different phases of globalization

· Index of globalization-openness index

· US and openness index

· Benefits of globalization

· Critics of Globalization

The International Institutions

· The reasons behind the birth of the institutions

· Specific Purpose and structure of different international institutions

· The IMF

· The World Bank

· GATT/WTO

· Different Rounds of Trade Talks

· Importance of the Uruguay Round

· Doha Round

· Critiques of the international institutions

· Inappropriateness of policies

· Decision made by industrialized countries with higher share of votes

· Loss of sovereignty

· RTAs

· RTA vs. WTO Philosophy

· WTO’s support for RTAs

· Trade Creation vs. Trade Diversion

Levels of Integration

· Preferential or Partial Trade Agreement

· Free Trade Areas

· Customs Union

· Common Markets

· Economic Union

The Classical Explanations of Trade

· Mercantilism- philosophy, policy, result

· Absolute Advantage-concept, computation, recommendation, result

· Comparative Advantage- why superior?

· Ricardian Model and Comparative Advantage-

· opportunity cost,

· computation of opportunity cost

· trade direction

· International trade price

· gains from trade- countries consume beyond their Production Possibility Frontier.

· Evolved production pattern based on comparative advantage

· New worldwide production network and gains of emerging countries

· New worldwide production network and concerns of developed countries

H-O Theory

Factor Endowment as source of comparative advantage

Relative Factor Abundance

Relative Factor Scarcity

Extension from Ricardo Model

Introduction of different factors- Labor and capital

Assumption of different technology between different sectors of production

· One sector is capital intensive-requires more capital per unit of labor

· One sector is labor intensive-requires more labor per unit of capital

Absence of Constant cost of production

Increasing cost of production

Complete Specialization does not happen

Recommendation:

· Export product produced with intensive use of abundant factor

· Import products produced with intensive use of scarce factor

· Trade over the years will cause Factor price equalization between the trading countries

Other names of H-O Theory:

· Factor Proportion Theory

· Factor Price Equalization Theory

Stolper-Samuelson Extension:

· Income Distribution reflected from H-O theory

· Income of abundant factors increases with trade

· Income of scarce factors decreases with trade

Note: All problems done in class notes and assigned for homework must be reviewed.