Chapter 5 Summary Flashcards
Describe the benefits, volumes, and patterns of international trade
Trade provides a country’s people w a greater choice of goods and services and is an important element of job creation in many countries.
Exports of merchandise and services and trade follow the pace of the world economic output.
Wealthy nations make up 60% of world Merch trade.
Explain how mercantilism worked and identify its inherent flaws
Mercantilism says that nations should accumulate financial wealth in the form of gold be encouraging exports and discouraging imports.
It is flawed because it assumes a nation increases its wealth at the expense of other nations. It restricts the economic development of colonies, limiting the amount of goods they can purchase from the wealthy nation.
Detail the theories of absolute advantage and comparative advantage
Absolute advantage: The ability of a nation to produce a good more efficiently than any other nation. Allows a country to produce goods and trade with other nations to obtain goods it needs but does not produce.
Comparative advantage: When a nation is unable to produce a good more efficiently than other nations but can produce it more efficiently than any other good.
Summarize the factor proportions theory of trade
The theory states that countries produce and export goods that require resources (Factors) that are abundant and import goods that require resources that are in short supply. It predicts that a country will specialize in products that require labor if its cost is low relative to the cost of land and capital (and vice versa).
The paradox between predictions of the theory and the actual trade flow is called the Leontief paradox.
Explain the international product life cycle
A company will begin exporting its product and later undertake FDI as the product moves through its lifecycle. In the new product stage, production remains based in the home country, in the maturing stage, production begins in countries with the highest demand, and in the standardized stage, production moves to low-cost locations to supply to a global market.
Outline the new trade theory and the first-mover advantage
As specialization and output increase, companies realize economies of scale that push the unit costs of production lower, forcing potential new entrants to the industry to produce a similar level of output w competitive pricing. This helps a firm to gain a first mover advantage, gained by being the first company to enter an industry.
Describe the national competitive advantage theory and the Porter diamond.
National competitive advantage theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.
Porter Diamond identifies 4 elements that form the basis of national competitiveness: Factor conditions, Demand conditions, Related and supporting industries, firm strategy/structure/rivalry.
