Trade theory Flashcards
What is international trade?
International trade is trade between the residents (individuals, businesses, nonprofit organizations, or other forms of associations) of two countries. Trade involves the voluntary exchange of goods, services, or money.
Why does intl trade occur?
International trade occurs because the parties to the transaction believe that they benefit from the voluntary exchange
What is the difference between comparative advantage and absolute advantage?
The difference between absolute advantage and comparative advantage is that the former looks at absolute differences in productivity, while the latter looks at relative productivity differences. The difference between the theories exists because comparative advantage incorporates the concept of opportunity costs in determining which good should be produced.
How useful are country-based theories in explaining intl trade?
The country-level theories are useful for explaining interindustry trade (trade in which countries exchange goods produced in different industries) among nations; however, they are not helpful in explaining intraindustry trade (trade in which countries exchange goods produced in the same industry).
The latter form of trade accounts for approximately 40 percent of world trade, yet cannot be predicted by country-level theories.
What is the difference between interindustry and intraindustry trade?
The difference between interindustry trade and intraindustry trade is that the former involves two countries exchanging goods produced in different industries, while the latter involves two countries exchanging goods produced in the same industry
how do political factors influence intl trade and investments?
Political factors influence international trade and investment when firms choose to invest in a foreign factory as a means of avoiding trade barriers, and when firms invest in foreign countries in order to take advantage of economic incentives offered by host government
Why is intraindustry trade not predicted by country-based theories of change?
They focus on explaining interindustry trade. This is because country-level theories use the country as a unit of analysis, and examine differences in the characteristics of a country (such as land, labor, and capital) to explain trade between nations. In contrast, firm-based theories use the firm as a unit of analysis and focus on differences between firms (such as ownership
advantages) to explain trade between countries
What is trade?
Voluntary exchange of goods, services, assets, or money between one person/organisation and another
What characterises early country-based theories?
- focus on ind country as unit of analysis
- describes trades in commodities
- price is an imp component of a customer’s purchase decision
- explains interindustry trade
What are the 4 theories covered in country-based theories?
Mercantilism, absolute advantage, comparative advantage, relative factor endowments
What are the 2 theories covered in firm-based theories?
Country similarity theory, new trade theory
What characterises modern firm-based theories?
- focus on firm’s role in promoting intl trade, firms as units of analysis
- useful for describing patterns of trade in differentiated goods
- believes in brand name as imp component of the purchase decision
- explains intraindustry trade
what is mercantilism?
16th century economic philosophy maintaining a country’s wealth is measured by its holdings of gold and silver. The goal should be to enlarge these holdings by promoting exports + discouraging imports
What is a synonym for protectionist?
Neomercantilist
What is a criticism of mercantilism?
it weakens the country, squanders a country’s resources producing goods its not suited for
What does the Absolute Advantage theory state?
A country should export those goods and services for which it is more productive than other countries are and import those goods and services for which other countries are more productive than it is
In which case will trade not occur selon the AA theory?
No trade will occur if a country has Abs Adv in two products
What is the Comparative Advantage theory?
- u are better off specialising in what you do relatively best
- produce/export those goods and services u are relatively best able to produce
- buy other goods and services from ppl who are relatively better at producing them than u are
What does the Relative Factor Endowment Theory state?
A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance. It follows the patterns of comparative advantage.
In what sense does the relative factor endowment theory follow the patterns of comparative advantage?
-Export products that use relatively abundant factors of production
- import products that need relatively scarce factors of production
why did firm-based theories develop?
- Growing importance of MNCs in the postwar international economy
- Inability of country-based theories to explain + predict existence/growth of intra-industry trade
- Failure to empirically validate Heckscher-Ohlin theory
- Firm-based theories incorporate factors such as quality, technology, brand names, customer loyalty to explain trade flows
What does the Country Similarity Theory state?
most trade in manufactured goods should be between countries with similar per capita incomes + intraindustry trade in manufactured goods should be common. -> per capita income is the sole factor of similarity
What does the New Trade Theory suggest?
Economies of scale occur if a firm’s avg cost of producing a good decreases as output of that good increases. It is an extension of Linder’s analysis by incorporating the impact of econs of scale on trade in differentiated goods.
What are supply factors influencing FDI decisions?
Production cost
logistics
availability of natural resources
access to key technology
What are demand factors influencing FDI decisions?
customer access
marketing advantage
exploitation of competitive advantages
customer mobility
What are political factors influencing FDI decisions
Avoidance of trade barriers
development of incentives, ie free trade zones
What is the formula for time saved in production?
How long it would’ve taken - how long it took for what I made = time saved
What is the formula for opportunity cost?
OC = what one sacrifices / what one gains
OC = return on the best forgone option / return on the chosen option
