Trade Theories Flashcards
Define Absolute Advantage?
The ability of a nation to produce commodities more efficiently than another nation
What is specialization?
The specific use of resources in narrowly defined economic activity. Specialization leads to an absolute advantage
What is overcapacity?
A symptom of absolute advantage where a country is producing more than the world needs
What is comparative advantage?
The ability of a nation to produce a lower opportunity cost of a product during production than another nation
Extend on comparative advantage?
David Ricardo’s theory of comparative advantage argues that nation may benefit from specialization and trade even when a nation has an absolute advantage over another nation in the production of all commodities
What is free trade?
This refers to a policy of allowing market forces to determine, demand, supply and price
Therefore, local producers are not given any government assistance to compete against foreign countries
What is trade policy?
Trade policy generally reflects government attitude towards market competition.
The key to this in international trade and international markets, is whether local producers receive government assistance to compete against foreign producers
What is competitive advantage?
Trade advantages obtained through the capacity of a nation’s industries to innovate and upgrade
Extend on competitive advantage?
Harvard economist Michael Porter introduced his theory of competitive advantage in which he argues that a nation’s prosperity relies on the ability of its industries to be innovative and adopt to technology. He developed four broad criteria for a nation to achieve competitive advantage of its industries
What are the categories of porter diamond of national competitive advantage?
Factor conditions
Demand conditions
Related and supporting industries
Firm strategy and rivalry
What are factor conditions?
The nation must have an advantage in factors of productions, for example skilled labour or infrastructure.
What are demand conditions?
The nation can benefit from having a clearer view of consumer demand by first developing domestic market to help anticipate international market needs
What are related and supporting industries?
A nation can gain an advantage by having efficient and internationally competitive supplier industries
What are firm strategy, structure and rivalry?
Conditions governing company creation, organization, management and domestic rivalry need to be disciplined, flexible and supportive of innovation
