by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How do Economies of Scale Lead to Trading Advantages? A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. The concept of economies of scale means that as the scale of output goes up, average...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is Splitting Up the Value Chain? Specialization in the world economy can be very finely split. In fact, recent years have seen a trend in international trade, which economists call splitting up the value chain. The value chain describes how a good is produced in...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Opportunity Costs relate to International Trade? Both parties can benefit from specializing in their comparative advantages and trading. By using the opportunity costs it is possible to identify the range of possible trades that would benefit each country....
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Comparative Advantage give rise to Mutually Beneficial Trade? When nations increase production in their area of comparative advantage and trade with each other, both countries can benefit. Again, the production possibility frontier is a useful tool to...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does the Production Possibilities Frontier reflect Comparative Advantage? Absolute advantage simply compares the productivity of a worker between countries. It answers the question, “How many inputs do I need to produce shoes in Mexico?” Comparative advantage asks...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is Absolute Advantage in All Goods? What happens to the possibilities for trade if one country has an absolute advantage in everything? This is typical for high-income countries that often have well-educated workers, technologically advanced equipment, and the...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Specialization allow for a gain from Trade? Consider the category of machinery, where the U.S. economy has considerable intra-industry trade. Machinery comes in many varieties, so the United States may be exporting machinery for manufacturing with wood, but...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
Is a Trade Balance or Trade Surplus Better? Because flows of trade always involve flows of financial payments, flows of international trade are actually the same as flows of international financial capital. The question of whether trade deficits or surpluses are good...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How Does the Business Cycle Affect Trade Balances? In the short run, whether an economy is in a recession or on the upswing can affect trade imbalances. A recession tends to make a trade deficit smaller, or a trade surplus larger, while a period of strong economic...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How does Domestic Saving and Investment Determine the Trade Balance?One insight from the national saving and investment identity is that a nation’s own levels of domestic saving and investment determine a nation’s balance of trade. To understand this point,...
