international trade

Question 1

what is the mercantilism theory?

Answer 1

a theory suggesting that it is in a country’s best interest to maintain a trade surplus

the mercantilism theory also advocated for **government intervention **to achieve a surplus in the balance of trade

the mercantilism theory views trade as a zero sum game

Question 2

what is the absolute advantage theory? what are the sources of absolute advantage?

Answer 2

adam smith argued that that a country has absolute advantage in the production of a product when it is more efficient than ANY OTHER COUNTRY in producing it

the sources of absolute advantage are:
1. natural resources
2. acquired knowledge
3. product technology
4. process technology

Question 3

what is the comparative advantage theory?

Answer 3

david ricardo suggests that countries should specialize in the PRODUCTION of those goods they produce most EFFICIENTLY and BUY goods they produce LESS EFFICIENTLY (even if they could do a better job). Basically countries should go all in on their strengths

Question 4

what is Ohlin’s factor proportions theory?

Answer 4

Ohlin proposes that comparative advantage arises from differences in national factor endowments - that is the extent to which a nation is endowed with resources like labor, land, and capital

Ohlin’s theory predicts that countries will export goods that are locally abundant and import those goods that are locally scarce

Question 5

what is the product life cycle theory?

Answer 5

as products mature, both the location of sales and the optimal production location will change affecting the flow and the direction of** trade**

for example: a country might start **exporting **in a foreign country. If demand is strong enough, that foreign country’s enterprises might start producing the same product

Question 6

what is the new trade theory?

Answer 6

the new trade theory suggests that the ability of firms to gain economies of scale can have important implications for international trade. With trade, markets are large enough to support the production necessary to achieve economies of scale.

In addition to this, trade is mutually beneficial because it allows for the specialization of production and the realization of economies of scale

Question 7

what is the first mover advantage?

Answer 7

the first mover advantage refers to the economic and strategic developments that accrue to early entrants into an industry, for example it is more hard to gain a scale based cost advantage for later entrants

Question 8

how does porter explain how a nation achieves international success in his “competitive advantage of nations” view?

Answer 8

he explains it in 4 attributes:

1. factor conditions: a nation’s factors of production like natural resources, climate, location (basic) and skilled labour, infrastructure, technological know how (advanced)
2. demand conditions: nature of home demand has a big influence on development
3. related and supporting industries: the presence of absence of supplier industries and related industries which contribute to success of a sector
4. context for firm strategy, structure, and rivarly: these are the conditions governing how firms are created, organized, and managed

Question 9

what is porter’s diamond model?

Answer 9

a model in which he considers also chance and government intervention in his “competitive advantage of nations” reasoning. Basically, he says that chance impacts factor conditions and firm strategy structure & rivarlvy, while the government influences related and supporting industries and demand conditions

Question 10

what does the WTO do?

Answer 10

1. promote free international trade
2. reduce trade barriers
3. issue rules and regulations regarding international trade
4. work as dispute settlement body among member nations

Question 11

which are the 2 WTO basic principles?

Answer 11

1. non discrimination
2. reciprocity

Question 12

what is the rationale behind international trade barriers?

Answer 12

1. economic reason: protect infant industries or achieve balance of payments goals
2. political reasons: national and food security
3. cultural reasons

Question 13

what 3 types of tariffs exist?

Answer 13

1. specifi tax: fixed charge per unit
2. ad valorem: % of value
3. combination tax: a combination of 1 and 2

Question 14

what types of non tariff barriers are you aware of?

Answer 14

1. embargo (IMPORT PROHIBITION)
2. import quotas
3. VER (voluntary export restraints): quotas on trade imposed by the exporting country
4. subsidies
5. corruption
6. administrative barriers (lots of bureaucracy)