Trade Theories (Joe) Flashcards
What is the theory of Mercantilism?
Classical Trade Theory
Nations accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports
What is the Absolute Cost Advantage trade theory?
Classical Trade Theory
1776 - Adam Smith
A country will gain economically if it specialises in the production of that commodity which it can produce most cheaply (Input VS output).
What is the Comparative Advantage trade Theory?
Classical Trade Theory
1817 - David Ricardo
A country will gain economically if it specialises in the production of that commodity for which it has the greatest relative advantage or least relative disadvantage.
What is a flaw in the logic of Absolute Advantage?
Absolute Advantage suggests there is no benefit for a country that has no absolute advantage commodity, therefore stronger economies would win and weaker economies would lose
What are the assumptions of Absolute and Comparative Advantage? (Trade Theories)
Assumption:
- Nations only strive to maximise production and consumption
- Only two countries product and consume 2 goods
- Transport costs aren’t factored in
- Labour is the only resource needed
- Specialization doesn’t create efficiency gains
What is the Factor Proportions Theory?
Classical Trade Theory
Countries produce and export goods that require resources (factors) that are abundant and import goods that require scarce resources.
What is Inter-Industry Trade?
Exchanges of goods produced in ONE INDUSTRY in Country A for goods produced by a DIFFERENT INDUSTRY in Country B
EG. French wine for Italian Shoes
What is Intra-Industry trade?
The trade between two countries of goods produced in the same industry.
What is the Country Similarity Theory?
Modern Trade Theory
1961 - Steffan Linder
Most trade in manufactured goods is between countries of similar per capita income
EG. Australia trades with America
per capita: “per person”
What is the International Product Life Cycle?
What are its 3 cycles?
1960’s - Raymond Vernon
A company begins exporting and undertakes FDI as its product moves through its life cycle.
1) New Product
2) Maturing Product
3) Standardized Product
What is the National Competitive Advantage Theory? (Porters Diamond)
(Modern Trade Theory)
1990 - Michael Porter
Success in international trade comes from 4 factors:
- Factor Conditions (Labour, Land, Infrastructure)
- Demand Conditions (Consumer Base)
- Related and Supporting Industries (Promixity to Suppliers)
- Firm Strategy, Structure and Rivalry (Competition and Local Investment)
What are the 3 pillars of Mercantilism?
Classical Trade Theory
MAINTAIN TRADE SURPLUS
Always gain off trades
GOVERNMENT INTERVENTION
Protectionism, imposed tariffs, subsidization
COLONIALISM
Capturing territory and exploiting economies
What are the downsides for a nation that uses Mercantilism?
Classical Trade Theory
TRADE IS ZERO SUM
Win-Lose Scenario. If all nations acted this way, trade would be severely limited
LIMITS COLONIES MARKET POTENTIAL
Stagnation limits the potential market and also…
CONSTRAINS OUTPUT AND CONSUMPTION
Which then leads to…
IMPAIRED GROWTH OF DEVELOPING WORLD
What is the New Trade Theory?
Modern Trade Theory
1970s
Gains made from specialisation, that lead to economies of scale.
These gains lead to FIRST MOVER ADVANTAGE
(First to enter a market can create barriers to entry)
Government may play a role in assisting its home-based companies.
