Question 1

What do trade economists mean by "fragmentation" and how does fragmentation relate to "global value chains"?

Accepted Answer

Trade economists use the term "fragmentation" to describe the process of breaking down the production of goods and services into smaller tasks or stages that can be spread across different countries. This can involve different stages of production, such as design, manufacturing, assembly, and distribution, being carried out in different locations around the world.

Fragmentation is closely related to the concept of "global value chains" (GVCs), which refers to the international dispersion of production activities across different countries. In a global value chain, different stages of production are often carried out in different countries, with intermediate goods and services being traded across borders multiple times before a final product is completed.

The concept of fragmentation is important in understanding how modern international trade operates. It highlights the interconnectedness of different economies and the extent to which countries rely on each other for the production of goods and services. It also emphasizes the role of services, such as transportation, logistics, and information and communication technology, in facilitating the smooth operation of global value chains.

Overall, fragmentation and global value chains are key concepts in trade economics that highlight the complex and interdependent nature of international trade and production processes in the modern global economy.

Question 2

What is depicted by the "smile curve", and is the curve always found "smiling" in major industries?

Accepted Answer

The "smile curve" is a concept used to describe the value-added distribution across different stages of the production process in various industries, particularly in the context of global supply chains. The curve was first conceptualized by Stan Shih, the founder of Acer Inc., in the 1990s. It is depicted as a U-shaped curve when plotted on a graph, where the vertical axis represents the value added by each stage of production and the horizontal axis represents the different stages of the production process, from the initial concept and design to the final sales and after-sales services.

The "smile curve" suggests that the highest value-added stages of production are typically at the beginning (research and development, design) and at the end (marketing, branding, after-sales services) of the supply chain. In contrast, the middle stages, which often involve manufacturing and assembly, tend to add less value. This is because the beginning and end stages usually require more specialized skills, knowledge, and innovation, while the middle stages are more labor-intensive and can be subject to intense competition and cost pressures, leading to lower profit margins.

The curve is called a "smile" because when the value-added is plotted, the graph resembles a smiling face, with the high-value stages at the two ends curving upwards like a smile.

However, the "smile curve" is not universally applicable to all industries or companies within an industry. The shape of the curve can change based on several factors, including technological advancements, changes in consumer preferences, the strategic positioning of firms, and the competitive dynamics within the industry. For instance, in some industries, manufacturing might become more specialized and high-tech, leading to a higher value-added in that stage and potentially flattening the curve. In other cases, companies might successfully integrate vertically, capturing more value across different stages and altering the traditional "smile" shape.

Moreover, the "smile curve" can evolve over time as industries mature, innovate, or face disruptions. For example, the rise of digital products and services has shifted value creation towards software development and data analytics, which may not fit the traditional manufacturing-centric smile curve model.

In summary, the "smile curve" is a useful conceptual tool for understanding where value is created in the production process, but it is not a fixed representation and does not apply uniformly across all industries or remain constant over time.

Question 3

What are regional production networks and how do they relate to "glocalisation"?

Accepted Answer

Regional production networks refer to the interconnected system of production and supply chains that exist within a specific geographic region. These networks involve the collaboration and coordination of various companies, suppliers, and manufacturers to produce goods and services within the region. This can involve the sourcing of raw materials, the manufacturing of components, and the assembly of final products, all within the same regional area.

The concept of "glocalisation" is the combination of the words "global" and "local," and it refers to the adaptation of global products and services to fit the specific needs and preferences of local markets. Regional production networks are closely related to glocalisation because they enable companies to tailor their products and services to the specific demands of the regional market while still benefiting from the efficiencies and economies of scale that come from global production and distribution networks.

By leveraging regional production networks, companies can take advantage of local expertise, resources, and market knowledge to create products that are better suited to the unique preferences and requirements of the regional market. This allows companies to achieve a balance between the standardization and customization of their offerings, ultimately leading to greater success in the global marketplace. In this way, regional production networks play a crucial role in facilitating glocalisation by enabling companies to effectively localize their products and services within a global context.

Question 4

Can a country that is "worse in everything" become a successful exporter of some goods?

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Question 5

Is trade according to the principle of comparative advantage a zero-sum game?

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Question 6

What are the "terms of trade"?

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Question 7

What is the role of wages and exchange rates in the model of comparative advantage with many goods in determining exports and imports of country?

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Question 8

Can a successful exporter in a country be negatively affected by events that happen to other sectors in that country? Explain why and how.

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Question 9

Identify the 5 correct statements 
1. With "fragmentation" economists denote the uneven spread of economic activity over the globe
2. Because the "Smile Curve" is an empirical concept, not all curves do necessarily "smile".
3. The interaction of centrifugal and centripetal forces in global trade can help to explain "glocalization".
4. Trading cars for gasoline is denoted as "intra-industry trade"
5. According to the principle of comparative advantage, trade increases welfare on a global level because it allows to realise economies of scale.
6. According to the principle of comparative advantage trade increases welfare on a global level because of efficiency gains from specialisation.
7. According to the principle of comparative advantage, efficiency gains from specialisation are distributed amongst trading partners according to the terms-of trade.
8. According to the principle of comparative advantage, trade is a zero-sum game as the gains of one trading partner are compensated fully by losses of the other trading partner.
9. Wages and exchange rates turn (Ricardian) comparative advantages of nations into competitive advantages of industries.
10. The export performance of the German textile industry cannot be influenced by the performance of the German automobile industry.

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1. With...

Question 10

What is the role of factor endowments in explaining trade?

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Question 11

Does the factor price equalisation theorem predict absolute global wage equalisation?

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Question 12

What is the Leontief paradox and how has its discovery changed the factor proportion theory?

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Question 13

How do you evaluate the impact of trade with China on unskilled workers in advanced countries in the light of the factor proportion theory?

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Question 14

What is predicted by the "product cycle theory of trade and investment"?

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Question 15

How differs the 3^rd wave of globalisation (trade in tasks) from the 2^nd wave when NICs emerged as exporters of manufactures?

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Question 16

Can comparative advantages be created by means of trade and industrial policy? And if yes, what could be key reasons behind it?

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Question 17

What could be reasons why in some countries infant industry protection was successful and in others not?

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Question 18

What are the expected effects of an integration of two markets where economies of scale and product differentiation are present?

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Question 19

What has been expected from the creation of the EU Single Market?

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Question 20

Identify the 5 correct statements 
1. Countries with a large absolute number of workers have always a comparative advantage in producing labour-intensive goods.
2. The factor price equalisation theorem predicts absolute global wage equalisation.
3. For full factor price equalisation full price equalisation is required.
4. The "Leontief paradox" has shown that the US was a net exporter of labour-intensive goods.
5. According to the "product cycle theory of trade and investment", labour-rich countries have a comparative advantage in the "maturing phase" of a good's product cycle.
6. With respect to changes in comparative advantages, "trade in tasks" is much less predictable than trade in goods.
7. The "learning curve" can serve as an argument to use industrial policies in a latecomer country to create a comparative advantage.
8. Latecomer countries should always use infant-industry-protection policies to catch-up by learning.
9. Integrating two markets where economies of scale and product differentiation are present can help to become more competitive in relation to third countries.
10. Integrating two markets where economies of scale and product differentiation are present leads to less competition, higher prices and, thus, higher profits.

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1. Countries...

Quiz 3: Global Trade