Trade Theories & Competitivness

Question 1

Classical trade theories (2)

Answer 1

• Mercantilism

- Comparative Advantage

Question 2

New trade theory

Answer 2

• Critical factor of determining international trade patterns is the economies of scale and networks effects that can occur in key industries
• Secialization increases output and the ability to enhance economies of scale
• World demand will support few competitors
• First mover advantage, competitors may emerge of “the got there first”
• First mover could scale up very fast
• Role of government is very important: policies/governance, institution etc, infrastrucre, education
• Importance of location economy

Question 3

Mercantilism

Answer 3

A country will gain wealth when exports exceed imports

Question 4

Goals of mercantilism (5)

Answer 4

• To earn gold & silver
• Gain wealth = store of government’s gold and silver
• Have a trade surplus
• Maximize exports through subsidies
• Limits imports through tariffs and quotas, or other methods.

Question 5

David Hume on Mercantilism: 1752 (4)

Answer 5

• Increased wealth(gold) and increased exports ultimately leads to growth and inflation.
• Imports keep inflation low
• Results: A country initially exporting ultimately becomes importer because of changes in relative prices.
• In the long run, no one can keep a trade surplus

Question 6

Is the mercantilist theory still valid? Where?

Answer 6

A qualified yes.

Especially in the court of public opinion.

Question 7

Neo-mercantilists =

Answer 7

protectionists

Question 8

Comparative Advantage

Answer 8

• Ability to produce goods at lower opportunity cost than of trade with partner
• Sell for less than competitors with higher margin
• -> BUT: world does not exist of 2 countries and two goods, no transportation cost assumed