international trade theories Flashcards
What is Adam Smiths theory
Hill (2022)- a country has absolute adv in production when more efficient production than any other nation w/o gov interference.
Zhang (2024)- prioritise and specialise production with absolute advantage and trade for other goods- also FMA
Adv of Adams Smiths theory
Zhang (2024)- mutual benefits from trade
Hill 2022- encourage innovation- focus on strengths- maintain adv
Zhang 2024- economic interdependence- stronger int relations
Limitations of Adam Smiths theory
Hill 2022- oversimplifies real world- assumes barter trade (2 nations, 2 goods, homogenous resources0
Zhang 2024- doesn’t account for gov polices
Hill 2022- doesn’t consider transport costs- importing, fuel etc
Example of Adam Smith theory
Investopedia 2024- Saudi Arabia- oil production- abundant resources, low production costs- specialise and export to other nations
Utility of Adam Smiths theory
Not applicable directly but gives insight to firms
Countries and firms can allocate resources most efficient sectors- boost economic output
in globalised economy- identifies absolute adv- helps firms integrate into int markets- optimise operations
What is New Trade Theory
Hill 2022- utilising econ of scale to increase variety of goods and decrease production costs
Zhang 2024- int trade enables markets to be large enough to benefit from econ of scale- allow specialization
Adv of New Trade Theory
Zhang 2024- drives innovation and global extension to further utilise econ of scale in order to increase profits
Hill 2022- encourage similar countries economically to conduct extensive trade
Hill 2022- gov support- grants, low interest loans and more help firms compete globally esp if first movers
Limitations of New Trade Theory
Zhang (2024)- nations can benefit w/o difference in resource endowment of tech as supplies and production costs are cheaper due to econ of scale, large operation and FMA
Hill 2022- FMA can lead to monopoly- barrier to entry
Example of New Trade Theory
Hill 2022- USA are major jet exporters due to Boeing and others being first movers and utilising econ of scale to create and maintain a competitive adv- hard for new entrants
Utility of New Trade Theory today
Firms can specialise in goods that benefit from increasing returns to scale - dominate global markets
Gov can justify supporting local industries with subsidies etc as helps them compete globally therefore leading to job creation and increased GDP.
First movers can establish dominance guiding firms to invest in emerging markets and industries to secure long term adv
what is Porters Diamond of Comparative Advantage theory
Hill 2022- comparative adv that a nation/firm possess is based on 4 factors- factor endowments, demand conditions, relating industries and firm strategy. combined with gov intervention and chance creates comparative adv
Adv of Porters Diamond of Comparative Advantage theory
Hill 2022- identifies why certain industries thrive in countries- swiss pharmaceuticals and german cars
Zhang 2024- drives innovation and tech advancement- increases efficiency and decreases production costs and maintaining comparative adv
Hill 2022- strong domestic demand drives int success- relating industries make supplies cheaper- encourages high standards too
implications of Porters Diamond of Comparative Advantage theory
Zhang 2024- disperse activities to different nations to utilise location economies- main country losses many benefits (jobs, tax money and more)
Zhang 2024- FMA unfair
Hill 2022- focuses on developed nations and strong markets- overlooks structural challenges developing nations face - weak infrastructure
Zhang 2024- firms want policies from gov that benefit all areas of diamond
Example of Porters Diamond of Comparative Advantage theory
Investopedia 2024-Japan - global competitiveness > natural resources as skilled engineers helped build strong automobiles and consumer electronic sectors
Utility of Porters Diamond of Comparative Advantage theory today
Helps firms understand why certain industries thrive in some nations- firms analyse and compare positions- implement strategies to compete
Help evaluate countries to determine whether they have favourable decisions based on the 4 factors for expansion
Gov can use it to identify and support industries with potential for global competitiveness by fostering clusters, investing in education or improving infrastructure
