5.1: An Overview of Trade Theory Flashcards
What is mercantilism, and how did it influence trade policies in the sixteenth and seventeenth centuries?
Mercantilism advocated for countries to encourage exports and discourage imports simultaneously.
Although it’s an old and discredited doctrine, its echoes can be found in modern political debates and trade policies of some countries.
What was Adam Smith’s theory of absolute advantage, and how did it differ from mercantilism?
Smith’s theory of absolute advantage, proposed in 1776, argued for unrestricted free trade.
He emphasized that the invisible hand of the market, not government policy, should determine a country’s imports and exports.
This stance implied a laissez-faire approach toward trade, contrasting with the interventionist nature of mercantilism.
What is the theory of comparative advantage, and who proposed it?
The theory of comparative advantage was advanced by the nineteenth-century economist David Ricardo.
It serves as the intellectual basis for the modern argument for unrestricted free trade.
The theory suggests that countries should specialize in producing goods in which they have a comparative advantage, leading to mutually beneficial trade relationships.
How was Ricardo’s theory of comparative advantage refined in the twentieth century, and what is the refined theory known as?
In the twentieth century, Swedish economists Eli Heckscher and Bertil Ohlin refined Ricardo’s theory, leading to the Heckscher-Ohlin theory.
This theory emphasizes that countries should specialize in producing goods that use their abundant factors of production, be it labor, capital, or resources.
This specialization optimizes production efficiency and supports the case for unrestricted free trade.
What is the common sense notion regarding international trade, as explained in the text?
Common sense suggests that international trade is beneficial when a country can exchange products it can produce at a low cost (like fish in Iceland) for products it cannot produce at all (like oranges).
How do the theories of Smith, Ricardo, and Heckscher-Ohlin go beyond common sense notions regarding international trade?
These theories show that it’s beneficial for a country to engage in international trade even for products it can produce for itself.
Countries can specialize in products they can manufacture most efficiently and import goods that are more efficiently produced in other countries, leading to economic gains.
Why might it make sense for a country to import certain products that it could produce domestically, according to the theories of Smith, Ricardo, and Heckscher-Ohlin?
Countries may gain economically by importing products that can be produced more efficiently in other nations.
For instance, Canada might import textiles from India due to India’s cheaper labor force, allowing Canada to specialize in areas where it has a comparative advantage, like heavy mining equipment production.
What is one of the key insights of international trade theory, as mentioned in the text?
One of the key insights is that limits on imports, such as quotas and tariffs, often benefit domestic producers but not domestic consumers.
Import controls can lead to higher prices for consumers, even though they may protect specific domestic industries.
How do developing nations view outsourcing, and what benefits does it bring to them according to the text?
Developing nations see outsourcing as a positive outcome of globalization, bringing the benefits of trade.
Multinational corporations can locate production in the markets they sell to, such as India, the Philippines, and China.
This not only provides cost savings, particularly on labor, but also establishes a local presence, enhances customer understanding, and fosters sustained relationships
Why might multinational corporations like Intel and Apple choose to outsource their research and development and other knowledge-based activities to developing nations, as per the text?
Multinational corporations might outsource knowledge-based activities to developing nations to establish a local presence, gain deeper customer insights, and build enduring relationships.
While cost savings, especially on labor, are a factor, the text suggests that long-term benefits such as relationship building might be even more significant.
What aspects of international trade do the theories of Smith, Ricardo, and Heckscher-Ohlin help explain, and what are some examples of trade patterns mentioned in the text?
The theories of Smith, Ricardo, and Heckscher-Ohlin help explain the pattern of international trade.
Examples include Ghana exporting cocoa, Brazil exporting coffee, and Japan exporting automobiles and consumer electronics.
These theories focus on factors of production like land, labor, and capital.
How does David Ricardo’s theory of comparative advantage explain international trade patterns, and what does the Heckscher-Ohlin theory emphasize regarding factors of production?
Ricardo’s theory explains trade patterns based on international differences in labor productivity.
The Heckscher-Ohlin theory emphasizes the interplay between the availability of factors of production in different countries and their need for producing specific goods, considering factors like land, labor, and capital.
What is the product life-cycle theory, and how does it attempt to explain the international trade patterns of new products?
The product life-cycle theory, proposed by Raymond Vernon, suggests that new products are initially produced and exported from the country where they were developed.
As the product gains international acceptance, production starts in other countries, and it might eventually be exported back to the country of its origin.
What is new trade theory, and why does it emphasize the limited number of firms in certain industries?
New trade theory stresses that countries specialize in certain products not just due to differences in factor endowments, but also because some industries can support only a limited number of firms.
Industries like commercial aircraft may favor the first movers, allowing them to build competitive advantages that are difficult for others to challenge.
What does Michael Porter’s theory of national competitive advantage attempt to explain, and what factors does it consider in a nation’s dominance in specific industries?
Michael Porter’s theory of national competitive advantage explains why certain nations succeed internationally in specific industries.
It considers factors like domestic demand, domestic rivalry, and factor endowments, emphasizing the importance of these elements in a nation’s dominance in the production and export of particular products.
