trade theories (final)

Question 1

what was free trade based on in the 1600s?

Answer 1

mercantilism

Question 2

explain mercantilism

Answer 2

exports>imports

receiving bullions as payment (gold and silver)

it’s a win-lose situation (zero-sum game)

Question 3

goal of mercantilism

Answer 3

increased gdp, which leads to economic growth, which leads 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

what is absolute advantage based on?

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

1. the world is split into 2 countries
2. only 2 products are produced
3. same and fixed resources in both countries
4. only factor is labor

Question 8

what introduced comparative advantage in 1800’s

Answer 8

ricardo’s theory

Question 9

what did Ricardo’s theory claim?

Answer 9

countries should specialize in producing goods that have the lowest opportunity cost

Question 10

what does HO-theory claim

Answer 10

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

Question 11

countries that have labor> capital

Answer 11

produce goods that are labor intensive

Question 12

countries that have capital>labor

Answer 12

produce capital intensive goods

Question 13

example of labor intensive

Answer 13

egypt and china

Question 14

what is the leontiff paradox (1950’s-60’s)

Answer 14

going against what’s expected. although USA is capital abudent they were producing labor intensive

Question 15

who introduced the product life cycle theory

Answer 15

Raymond Vernon (mid 1960)

Question 16

what is the product life cycle theory based on?

Answer 16

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 however this theory is outdated, as production stays in developing countries

Question 17

what are the product life cycle stages?

Answer 17

1. introduction
2. growth
3. maturity
4. decline

Question 18

what happens in the introduction?

Answer 18

developed countries produce

Question 19

what happens in growth?

Answer 19

developed countries export to developing countries

Question 20

what happens in maturity?

Answer 20

developing produce and export to developed

Question 21

what happens in decline

Answer 21

demand starts to decrease so supply decreases, leading to innovation and cycle starts again

Question 22

who introduced national competitive advantage theory

Answer 22

porters diamond

Question 23

what is national competitive advantage theory?

Answer 23

explains how countries achieve national competitive advantage in certain industries

Question 24

what are the key factors of national competitive advantage

Answer 24

1. factor endowments
2. demand conditions
3. related + supporting industries
4. firm strategy and rivalry

Question 25

who introduced new trade theory

Answer 25

paul krugman (1970-1980)

Question 26

what is new trade theory based on?

Answer 26

focuses on economies of scale and product differentiation

Question 27

what is a world without trade?

Answer 27

variety of goods a country can produce and scale of production are limited by size of market

Question 28

what is a world with trade?

Answer 28

individual nation market combined into a large world market