Chapter 5 - International Trade Theories Flashcards
Shaped the economic policy of many nations for the past 50 years.
International Trade Theory
The driver behind the creation of World Trade Organization and regional trading blocks.
International Trade Theory
Benefits of trade emerging from theories:
1) Allows a country to specialize in the manufacture and export of products
2) Importing products that can be produced more efficiently in other countries
3) Interdependence among nations
4) Free trade
5) Regional economic balance
7 trade theories:
1) Zero-sum game
2) Absolute advantage
3) Comparative advantage
4) Factor endowment
5) The product-life cycle
6) The new trade theory
7) National competitive advantage
An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports.
Mercantilism
Maintain trade surplus through government intervention.
Mercantilism
When a country is more efficient than any other country producing it.
Absolute Advantage
Ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.
Absolute Advantage
Proposed in 1776, Adam Smith’s theory was the first to explain why unrestricted free trade is beneficial to a country.
Absolute Advantage
Refers to an economy’s ability to produce goods and services at a lower opportunity cost than that of trade partners.
Comparative Advantage
Gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.
Comparative Advantage
The value of the next-highest-valued alternative use of that resource.
Opportunity Cost
Argues that comparative advantage arises not just by differences in labour productivity but due to the differences in national factor endowments such as land, labour and capital.
Heckscher–Ohlin Theory
Predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.
Heckscher–Ohlin Theory
Suggests early in their life cycle, most new products are produced and exported from the country they were first produced in but as the product is widely accepted internationally production starts in other countries.
Product Life Cycle Theory
Raymond Vernon’s theory.
Product Life Cycle Theory
Pointed out that the ability of firms to attain economies of scale might have important implications for international trade.
New Trade Theory
Paul Krugman’s theory.
New Trade Theory
Determines that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage.
National Competitive Advantage
Michael Porter’s theory.
National Competitive Advantage
4 broad attributes of a nation:
1) Firm strategy, structure, and rivalry
2) Demand conditions
3) Related and supporting industries
4) Factor endowments
2 variables that can influence national diamond:
1) Chance
2) Government
It makes sense for a firm to disperse its productive activities to those countries where they can be performed most efficiently.
Location
Firms that establish this with regard to the production of a particular new product may subsequently dominate global trade in that product.
First-Mover
Has a pivotal role in international trade and can promote free trade or trade restrictions.
Policy
