Ch 5- International Trade Theories Flashcards
International Trade Theory
It was the driver behind the World Trade Organization
* Played a role in the development of regional trading blocs such as
* European Union
* North American Free Trade Agreement. (NAFTA)
Free Trade
situations where a government does not attempt to influence
through quotas or duties what its citizens can buy from another country or what they
can produce and sell to another country
International trade allows a country to… (2 points)
- to specialize in the manufacture and export of products and services that it can
produce efficiently - to import products and services that can be produced more efficiently in other
countries
What is the mercantilist philosophy
makes a crude case for government
involvement in promoting exports and limiting imports
New trade theory and Porter’s theory
1970
national competitive
advantage justify limited and selective government intervention to
support the development of certain export-oriented industries
Mercantilism
Advocates government intervention to achieve a surplus in the
balance of trade
* A trade surplus is when exports > imports
* Mercantilism views trade as a zero-sum game - one in which a gain
by one country results in a loss by another
Smith’s Theory Of Absolute Advantage
Unrestricted free trade
a country has an absolute advantage in the production of a product when
it is it more efficient than any other country in producing
* Countries should specialize in the production of goods
for which they have an absolute advantage and then
trade these goods for goods produced by other
countries
* trade is a positive sum game
Ricardo’s Theory Of Comparative Advantage
Porter- Agrees with comparative Advantage
- The theory of comparative advantage (1817) countries should specialize in the
production of those goods they produce most efficiently and buy goods that they
produce less efficiently from other countries - this means buying goods from other countries that they could produce more
efficiently at home - Comparative advantage theory provides a strong rationale for encouraging free trade
1. total output is higher
2. both countries benefit
3. Trade is a positive sum game
absolute advantage vs comparative advantage
absolute advantage refers to the ability of an entity to produce a greater quantity of a product or service,
comparative advantage refers to the ability to produce goods and services at a lower opportunity cost compared to the competition.
Heckscher-Ohlin Theory
Comparative advantage arises from differences in national factor
endowments
1) The pattern of trade is determined by factor endowments (land, labor, and
capital)
2) Heckscher and Ohlin predict that countries will
* export goods that make intensive use of locally abundant factors
* import goods that make intensive use of factors that are locally
scarce
What Is The Product Life-Cycle Theory?
1) Product life-cycle theory - as products mature both the location of sales and the
optimal production location will move to other countries affecting the flow and
direction of trade
production of products is likely to switch from advanced countries to developing
countries over time
Three phases of the product life cycle theory
The theory is no longer valid: production is global now
1New Product phase
* The developed US market provides an incentive for US firms to develop new products
* These products are initially produced and sold in the US
2 Maturing Product phase
* As demand increases in other developed countries, U.S. firms will begin to export
* Increased demand in these countries results in production of the products in these countries
3 *Standardized Product phase
* As the market matures, the product becomes standardized.
* This results in increased price competition.
* Production consequently moves to developing economies (lower costs)
New Trade Theory
Two implications of New Trade Theory
1. Economies of scale can increase the variety of goods available to consumers
and reduce the cost of these goods
2. If economies of scale require a large proportion of world demand, first
mover advantages exist
Define Economies of Scale
are unit cost reductions associated with a large scale of output
* each nation can specialize in producing a narrower range of products that are produced at a lower cost
Determinants of National
Competitive Advantage: Porter
Porter argues that four broad attributes of a nation promote or impede
the creation of competitive advantage
