International Trade Flashcards

Which trade policy instrument involves the government paying domestic producers to lower their costs and gain a competitive advantage in export markets?

Answer: Export subsidy

An export subsidy is a government payment to domestic producers that reduces their costs, enabling them to sell at lower prices in foreign markets and gain market share.

The 'optimal tariff' argument for protection suggests that a large country can improve its welfare by imposing a tariff because it can:

Answer: Improve its terms of trade by reducing world demand for the import

A large country with market power can shift its terms of trade in its favor by imposing a tariff that reduces its import demand, thereby lowering the world price of the imported good.

Global value chains (GVCs) refer to:

Answer: The international dispersion of production stages across multiple countries

Global value chains describe how production processes are fragmented and distributed across different countries, with each country performing specific tasks or stages rather than producing entire goods.

Under the WTO's dispute settlement mechanism, if a member country loses a case and fails to comply, the prevailing party may:

Answer: Request authorization to suspend concessions (retaliate)

If a losing WTO member fails to bring its measures into compliance, the winning party can request authorization from the Dispute Settlement Body to suspend equivalent trade concessions as retaliation.

Special Drawing Rights (SDRs) issued by the IMF are best described as:

Answer: An international reserve asset supplementing member countries' official reserves

SDRs are an international reserve asset created by the IMF to supplement member countries' existing reserve assets; their value is based on a basket of major currencies.

Non-tariff barriers (NTBs) to trade include all of the following EXCEPT:

Answer: Ad valorem tariffs

Ad valorem tariffs are price-based taxes on imports and are explicitly tariff barriers, while sanitary standards, import licensing, and technical standards are examples of non-tariff barriers.

The 'new trade theory' pioneered by Paul Krugman emphasizes which factor as a key driver of international trade patterns?

Answer: Economies of scale and market structure

New trade theory, developed by Krugman and others, highlights how economies of scale and imperfect competition (rather than just factor endowments) can drive trade patterns and create comparative advantages.