Questions
1 Is trade a zero-sum game or a positive-sum game?
2 Explain (a) the principle of absolute advantage and (b) the principle of relative advantage.
3 Should there be trade if (a) a country has an absolute advantage for all products over its trading partner, and (b) if the domestic exchange ratio of one country is identical to that of another country?
4 What is the theory of factor endowment?
5 Explain the Leontief Paradox.
6 Discuss the validity and limitations of trade theories.
7 Distinguish among (a) free trade area, (b) customs union, (c) common market, (d) economic and monetary union, and (e) political union.
8 Does economic cooperation improve or impede trade?
Discussion assignments and minicases
1 Name products or industries in which the USA has a comparative advantage as well as those in which it has a comparative disadvantage.
2 Why is it beneficial for the well-endowed, resource-rich USA to trade with other nations?
3 For a country with high labor costs, how can it improve its export competitiveness?
4 Explain how the advanced economies should cope with the shift in comparative advantage.
5 There was a proliferation of regional trading arrangements in the 1990s. The European Union and the North American Free Trade Agreement in particular have commanded a great deal of world attention. There are numerous reasons for the formation of a regional trading arrangement. Some of the reasons are economic in nature, while others are political. As a policy maker for a medium-sized and developing country, list and explain the reasons that may motivate you to consider forming or joining a regional trade group.
NOTES
1 Adam Smith, Wealth of Nations (1776; reprint, Homewood, IL: Irwin, 1963).
2 David Ricardo, The Principles of Political Economy and Taxation (1817; reprint, Baltimore: Penguin, 1971).
3 “A Fresh Look at Keynes,” Finance & Development (December 2001): 60–3.
4 Richard S. Tedlow, Giants of Enterprise: Seven Business Innovators and the Empires They Built (New York, NY: HarperBusiness, 2003).
5 Eli Heckscher, “The Effects of Foreign Trade on the Distribution of Income,” in Readings in the Theory of International Trade, ed. Howard S. Ellis and Lloyd A. Matzler (Homewood, IL: Irwin, 1949); and Bertil Ohlin, Interregional and International Trade (Cambridge, MA: Harvard University Press, 1933).
6 Leslie Lipschitz, Timothy Lane, and Alex Mourmouras, “The Tosovksy Dilemma,” Finance & Development, September 2002, 30–3.
7 Michael E. Porter, The Competitive Advantage of Nations (New York, NY: Free Press, 1990).
8 Paul Cashin, Paolo Mauro, and Ratna Sahay, “Macroeconomic Policies and Poverty Reduction: Some Cross- Country Evidence,” Finance & Development (June 2001): 46–9.
9 Porter, Competitive Advantage.
10 Offshore Finance U.S.A. (September/October 2001): 66.
11 G. D. A. MacDougall, “British and American Exports: A Study Suggested by the Theory of Comparative Costs,” Economic Journal (December 1951); Robert Stern, “British and American Productivity and Comparative Costs in International Trade,” Oxford Economic Papers (October 1962); Bela Balassa, “An Empirical Demonstration of Classical Comparative Cost Theory,” Review of Economics and Statistics (August 1963).
12 Wassily W. Leontief, “Domestic Production and Foreign Trade: The American Capital Position Re-examined,” Proceedings of the American Philosophical Society (September 1953); Wassily W. Leontief, “Factor Proportions and the Structure of American Trade: Further Theoretical and Empirical Analysis,” Review of Economics and Statistics 38 (November 1956): 386–407.
13 “Trade Specialist Calls Current Rules Outdated,” IMF Survey, July 15, 1991, 209, 216.
14 “Opening Up to Capital Flows? Be Prepared Before Plunging in,” IMF Survey, May 19, 2003, 137.
15 “‘Let Chaos Reign,’ Grove Urges Execs,” San José Mercury News, September 27, 1995.
16 “Economists Discuss Transition to Market-Oriented Economies,” IMF Survey, February 4, 1991, 34–7.
17 J. E. Meade, Trade and Welfare (New York, NY: Oxford University Press, 1955); R. G. Lipsey and K.
Lancaster, “The General Theory of Second Best,” Review of Economic Studies 24 (1956): 11–32.
18 “Report Highlights Benefits of Economic and Monetary Union in Europe,” IMF Survey, November 26, 1990,
363–5.
19 “Denmark to Lift Ban on Drinks in Cans,” San José Mercury News, January 15, 2002.
20 “Common Past Fuels Drive to Agree Biggest EU Expansion,” Financial Times, December 10, 2002.
21 “European Central Bank Plans Reforms to Cope with EU Enlargement,” IMF Survey, February 3, 2003,
31–2.
22 C. Michael Aho, “‘Fortress Europe’: Will the EU Isolate Itself from North America and Asia?” Columbia
Journal of World Business 29 (fall 1994): 33–9.
23 “NAFTA’s Scoreboard: So Far, So Good,” Business Week, July 9, 2001, 54–5.
