trade theories

Question 1

what was free trade based on in 1600s

Answer 1

mercantilism

Question 2

explain mercantilism

Answer 2

exports>imports
receiving billions as payment for exports
it’s a win-lose situation (zero-sum game)

Question 3

what happens when GDP increases

Answer 3

economic growth increases leading to economic development

Question 4

how did free trade differ in the 1700s

Answer 4

-it was the spark of globalization
-based on specialization
-focus on optimizing resources
-governments lowered trade barriers

Question 5

who introduced absolute advantage in 1776

Answer 5

Adam Smith

Question 6

define absolute advantage

Answer 6

countries should specialize in producing products they have the highest efficiency in then trade. Win-win situation (positive sum game)

Question 7

what did adam smith assume

Answer 7

-the world is split into 2 countries
-only 2 products are produced
-same and fixed resources in both countries

Question 8

when was Ricardo’s theory of comparative advantage

Answer 8

1800s

Question 9

what does ricardo’s theory claim

Answer 9

countries should specialize in producing goods that have lowest opportunity cost

Question 10

what is opportunity cost

Answer 10

next best alternative given up by choosing another item

Question 11

what does HO theory claim

Answer 11

countries should specalize where they have highest factor endowment (labor and capital)