W4P2 (lecture): Theories of International Trade Flashcards
What is Mercantilism?
A theory and practice (1500-1800) that posits a fixed amount of wealth in the world, emphasizing that countries should export more than they import to amass treasure (favorable balance of trade).
Q: What is the main goal of Mercantilism?
A: To promote exports and restrict imports, solidifying national power through wealth accumulation.
Q: Who is associated with the concept of Absolute Advantage?
A: Adam Smith.
Q: What defines a country’s wealth according to Absolute Advantage?
A: A country’s wealth is based on its available goods and services rather than on gold.
Q: What does specialization in trade lead to?
A: Increased efficiency and benefits for all countries involved.
Q: What are the two sources of advantages in trade?
A: Natural advantages (e.g., climate, resources, transportation costs) and acquired advantages (e.g., design skill, process technology).
Q: Who introduced the concept of Comparative Advantage?
A: David Ricardo in 1817.
Q: How does Comparative Advantage differ from Absolute Advantage?
A: Comparative Advantage focuses on relative efficiency and labor costs, while Absolute Advantage is about a country’s overall capability to produce more.
Q: What is the Factor Proportions Theory?
A: The Heckscher-Ohlin theory that states countries specialize in producing goods that utilize their abundant and cheap factors of production.
Q: What does New Trade Theory address?
A: The reasons similar countries trade with each other, emphasizing the importance of growing returns to scale. Paul Krugman is a key figure in this theory.
Q: What is Strategic Trade Theory?
A: It examines how single firms can dominate the global market and how countries should respond, including the role of industrial policy.
Q: What are some examples of Strategic Trade Theory in practice?
A: Airbus and the CHIPS and Science Act.
Q: How can we summarize the evolution of trade theories?
A: Mercantilism/protectionism → Ricardo, comparative advantage, and free trade → Factor Proportions Theory → New and Strategic Trade Theories; industrial policy.
