Glossary

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Glossary Entries

Word(s)	Definition	Image	Caption	Link	Source
absolute advantage	A country has an absolute advantage in the production of a good if it can produce the good at a lower labor cost and if labor productivity in the good is higher than in another country.
Antidumping laws	Laws that provide protection to domestic import-competing firms that can show that foreign imported products are being “dumped” in the domestic market.
Antisubsidy laws	Laws that provide protection to domestic import-competing firms that can show that foreign imported products are being directly subsidized by the foreign government.
autarky	The situation in which a country does not trade with the rest of the world.
capital constraint	A relationship showing that the sum of the capital used in all industries cannot exceed total capital endowment in the economy.
capital endowment	The total amount of capital resources available to work in an economy during some period of time.
capital-labor ratio	The ratio of the quantity of capital to the quantity of labor used in a production process.
comparative advantage	A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country; alternatively, when the relative productivities between goods compared with another country are the highest.
Domestic factor mobility	When productive factors like labor, capital, land, natural resources, and so on can be reallocated across sectors within a domestic economy.
economic efficiency	The extent to which economic resources are transformed into products generating utility to consumers. Efficiency improves whenever greater output occurs per unit of input or when more satisfying consumption bundles are obtained.
Economies of scale	The feature of many production processes in which the per-unit cost of producing a product falls as the scale of production rises.
Endogenous variables	A variable whose value is determined as an outcome of, or solution to, the model. In the Ricardian model, the allocation of workers to production, the quantities of the goods produced, and the terms of trade are endogenous.
Exogenous variables	A variable whose value is determined external to the model and whose value is known to the agents in the model. In the Ricardian model, the unit labor requirements and the labor endowment are exogenous.
Factor mobility	The ability to move factors of production—labor, capital, or land—out of one production process and into another.
free and costless mobility	Factors that can be moved by their owners to another production process without impediment and without incurring any adjustment costs.
Heckscher-Ohlin (H-O) theorem	A theorem that predicts the pattern of trade in the H-O model. It states that the capital-abundant country will export the capital-intensive good and the labor-abundant country will export the labor-intensive good.
homogeneous	Goods, or production factors, that are identical and thus perfectly substitutable in consumption, or production.
immobile factor model	A standard Ricardian model with one variation in its assumptions, namely, that labor, the sole factor of production, is immobile between industries within a country.
income redistribution	Occurs when some individuals gain income while others lose or when individuals gain and lose income shares of total income.
increasing returns to scale	The feature of many production processes in which the productivity of a product increases as the scale of production rises.
intraindustry trade	Trade between countries that occurs within the same industry; for example, when a country exports and imports automobiles.
labor abundant	A country is labor abundant relative to another country if it has a higher labor endowment per capital endowment than the other country.
labor constraint	A relationship showing that the sum of the labor used in all industries cannot exceed total labor endowment in the economy.
labor endowment	The total amount of labor resources available to work in an economy during some period of time.
labor intensive	An industry is labor intensive relative to another industry if it has a higher labor-capital ratio in the production process.
Labor productivity	The quantity of a good that can be produced per unit of labor input. It is the reciprocal of the unit labor requirement.
magnification effect for prices	A relationship in the H-O model that specifies the magnitude of factor price changes in response to changes in the output prices. It is used to identify the real wage and real rent effects of output price changes.
magnification effect for quantities	A relationship in the H-O model that specifies the magnitude of output changes in response to changes in the factor endowments.
Monopolistic competition	A market structure that is a cross between the two extremes of perfect competition and monopoly.
monopoly	An individual or firm that is the sole seller of a product in a market.
monopsony	An individual or firm that is the sole buyer of a product in a market.
Most-favored nation (MFN)	The nondiscriminatory treatment toward identical or highly substitutable goods coming from two different countries.
mutually voluntary exchange	A trade of one item for another chosen willingly (i.e., without coercion) by both individuals in a market.
National treatment	The nondiscriminatory treatment of identical or highly substitutable domestically produced goods with foreign goods once the foreign products have cleared customs.
Opportunity cost	The value or quantity of something that must be given up to obtain something else. In the Ricardian model, opportunity cost is the amount of a good that must be given up to produce one more unit of another good.
production possibility frontier (PPF)	The set of all output combinations that could be produced in a country when all the labor inputs are fully employed. In the Ricardian model, the PPF is linear.
real wage	The quantity of a good that can be purchased per unit of work. Real wage is a measure of the purchasing power of a wage and is an effective measure of well-being.
Rybczynski theorem	A theorem that specifies how changes in endowments affect production levels in the H-O model. It states that an increase in a country’s endowment of a factor will cause an increase in the output of the good that uses that factor intensively and a decrease in the output of the other good.
Safeguard laws, escape clauses	Laws that provide protection to domestic import-competing firms that suffer a surge of imports.
Stolper-Samuelson theorem	A theorem that specifies how changes in output prices affect factor prices in the H-O model. It states that an increase in the price of a good will cause an increase in the price of the factor used intensively in that industry and a decrease in the price of the other factor.
tariff-rate quota	a low tariff set on a fixed quota of imports and a high tariff set on any imports that occur over that quota.
terms of trade	The amount of one good traded per unit of another in a mutually voluntary exchange. Often expressed as a ratio of prices and measured as a ratio of units; for example, pounds of cheese per gallon of wine.
unit labor requirements	The quantity of labor needed to produce one unit of a good.
value of the marginal product	The increment in revenue that a firm will obtain by adding another unit of labor to its production process.
World Trade Organization (WTO)	An international agency whose purpose is to monitor and enforce the Uruguay Round trade liberalization agreements and to promote continuing liberalizing initiatives with continuing rounds of negotiation.