ECON 101 Study Guide - Midterm Guide: Offshore Outsourcing, Import Quota, W. M. Keck Observatory
Chapter 8 Reading Notes
Hyperglobalization: international trade has soared due to complex chains of production
Goods and services purchased from other countries are imports
Goods and services sold in other countries are exports
Globalization is the phenomenon of growing economic linkages among countries
Hyperglobalization: phenomenon of extremely high levels of international trade
A country has a comparative advantage in producing a good or service if the opportunity cost
of producing the good or service is lower for that country than for other countries; analysis of
international trade is that opp. Costs are constant
Ricardian model of international trade: analyzes international trade under the assumption that
opportunity costs are constant
Autarky: a situation in which a country doesn’t trade with other countries
Countries can do better by engaging in trade than it could by not trading
They can do this by specializing in the good that they have the comparative advantage in and
exporting that and importing the one they don’t have the c. adv. in
The result of trade is a rise in total world production of goods
Trade liberates countries from self-sufficiency
Consumption choices of a country reflect both the preferences of its residents and the relative
prices- the prices of one good in terms of other in international markets
One requirement that relative price must satisfy is that no country pays a relative price greater
than its opportunity cost of obtaining the good in autarky
What determines comparative advantage isn’t the amount of resources used to produce a
good but the opportunity cost of the good=here, the quantity of other goods foregone in order
to produce a good
In countries where labor is highly productive in many industries, employers are willing to pay
high wages to attract workers, so competition among employers leads to an overall wage rate;
in countries where labor is less productive, competition for workers is less intense and wage
rates are correspondingly lower
Pauper labor fallacy: the belief that when a country with high wages imports goods produced
by workers who are paid low wages, this must hurt the standard of living of workers in the
importing country
Sweatshop labor fallacy: belief that trade must be bad for workers in poor exporting countries
because those workers are paid very low wages by our standards
These 2 fallacies miss the nature of gains from trade: it’s advantageous to both countries; in
most cases, trade that depends on low-wage exports helps them
There are 3 main sources of comparative advantage
Differences in climate: one key reason for comp. advantage is differences in climate
Differences in Factor Endowments: the mix of available factors of production ex. land and
labor differs among countries- so it is a source of comparative advantage
Factor abundance: refers to how large a country’s supply of a factor is relative to its supply of
other factors; factor intensity: measure of which factor is used in relatively greater quantities
than other factors in production
Factor intensity describes difference among goods ex. labor-intensive
According to Heckscher-Ohlin model, a country that has an abundant supply of a factor will
have a comparative advantage in goods whose production is intensive in that factor
The opportunity cost of a given factor- the value that the factor would generate in alternative
uses- is low for a country when it is relatively abundant in that factor
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Document Summary
Hyperglobalization: international trade has soared due to complex chains of production. Goods and services purchased from other countries are imports. Goods and services sold in other countries are exports. Globalization is the phenomenon of growing economic linkages among countries. Hyperglobalization: phenomenon of extremely high levels of international trade. A country has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that country than for other countries; analysis of international trade is that opp. Ricardian model of international trade: analyzes international trade under the assumption that opportunity costs are constant. Autarky: a situation in which a country doesn"t trade with other countries. Countries can do better by engaging in trade than it could by not trading. They can do this by specializing in the good that they have the comparative advantage in and exporting that and importing the one they don"t have the c. adv. in.
