trade theories (final) Flashcards
what was free trade based on in the 1600s?
mercantilism
explain mercantilism
exports>imports
receiving bullions as payment (gold and silver)
it’s a win-lose situation (zero-sum game)
goal of mercantilism
increased gdp, which leads to economic growth, which leads to economic development
how did free trade differ in the 1700s?
It was the spark of globalization
based on specialization
focus on optimizing resources
governments lowered trade barriers
who introduced absolute advantage in 1776
adam smith
what is absolute advantage based on?
countries should specialize in producing products they have the highest efficiency in then trade. win-win situation (positive sum game)
what did Adam Smith assume?
- the world is split into 2 countries
- only 2 products are produced
- same and fixed resources in both countries
- only factor is labor
what introduced comparative advantage in 1800’s
ricardo’s theory
what did Ricardo’s theory claim?
countries should specialize in producing goods that have the lowest opportunity cost
what does HO-theory claim
countries should specialize where they have highest factor endowment (labor and capital)
countries that have labor> capital
produce goods that are labor intensive
countries that have capital>labor
produce capital intensive goods
example of labor intensive
egypt and china
what is the leontiff paradox (1950’s-60’s)
going against what’s expected. although USA is capital abudent they were producing labor intensive
who introduced the product life cycle theory
Raymond Vernon (mid 1960)
what is the product life cycle theory based on?
when products hit maturity, it’s cheaper to produce in developing nations rather than developed nations. however this theory is outdated, as production stays in developing countries
what are the product life cycle stages?
- introduction
- growth
- maturity
- decline
what happens in the introduction?
developed countries produce
what happens in growth?
developed countries export to developing countries
what happens in maturity?
developing produce and export to developed
what happens in decline
demand starts to decrease so supply decreases, leading to innovation and cycle starts again
who introduced national competitive advantage theory
porters diamond
what is national competitive advantage theory?
explains how countries achieve national competitive advantage in certain industries
what are the key factors of national competitive advantage
- factor endowments
- demand conditions
- related + supporting industries
- firm strategy and rivalry
who introduced new trade theory
paul krugman (1970-1980)
what is new trade theory based on?
focuses on economies of scale and product differentiation
what is a world without trade?
variety of goods a country can produce and scale of production are limited by size of market
what is a world with trade?
individual nation market combined into a large world market
