Week 6 Flashcards
What is free trade
When the government doesn’t use tariffs or quotas to restrict customers on what they can/can’t buy from another country and what they can produce/sell
What are the benefits of free trade?
This provides freedom a country to specialize in manufacturing and exporting products that can be produced most efficiently in that country
What is the history of trade theory and government involvement?
Promote exports and limit imports
What is Mercantilism: Mid-16th Century?
talks about how a nations wealth depends on growing (accumulated) treasure
What did the nation depend on currency of trade?
Silver and gold
What does Mercantilism theory say?
Maximize the export through subsidies and minimize imports through tariffs and quotas
What is the flaw of Mercantilism
There’s a zero sum game
Who made the theory of absolute advantage
Adam Smith
What did Adam Smith Argue
the absolute advantage means that countries should produce goods that is efficient for them and trade those goods for where it is not efficient
What did Adam smith’s assume among nations?
There is an absolute balance and that trade between countries is beneficial
Who is David Ricardo?
He created the Principles of Political Economy of 1817
Who came up with the Principles of Political Economy 1817?
David Ricardo
What is the Principles of Political Economy 1817?
- talks about how efficiency of resource utilization leads to more productivity and import even if they are efficient in production than the country that they are buying form
- This basically talks about how it is best to better use resources and that trade is a positive sum game
What are immobile resources?
resources that are not easy to move around
What are diminishing returns specialization?
more units of a good that the country produces, the greater the additional resources required to product an additional item, hence, difference goods use resources in different portions
What is free trade in open economies
Free trade may increase a country’s stock of resources and increase its efficiency of resource utilization
What is the Heckscher 1919 to Ohlin 1933 Theory?
This theory talks about how export goods use factor endowments that are locally abundant, patterns of trade are determined by the differences on factor endowments not productivity
What is Corollary?
Import goods made from locally scarce factors
What advantage did Heckscher - Ohlin focus on?
Relative advantage which is when a new product is more superior than an existing one
What is Leontief paradox
Idea that a country with a higher capital per worker has a lower capital/labour ratio in exports than in imports
Who is the person who created the Product Life Cycle theory
R.Venon
What is the product life cycle theory
Talks about how as products mature, both location of sales and optimal production changes and how these affects the direction and flow of imports and exports
What makes the product life cycle theory less valid
Globalization and Integration
What is the new trade theory?
This requires industries with high fixed costs and competitors may emerge because of first mover advantage
What are the requirements of the new trade theory?
Industries with high fixed costs and that world demand will support few competitors
What may occur with the new trade theory?
Competitors may emerge bc of first mover advantage, economies of scale may preclude new entrants, role of government becomes significant
What are the arguments of the new trade theory?
This generates government intervention and strategic trade policy
What is the Theory of National Competitive Advantage?
Analyzes the reasons for a nations success in a particular industry
Who came up with this competitive advantage?
Porter
How many industries did he study and how many nations
100 industries and 10 nations
What are the four major attributes of the competitive advantage of a nation?
- Factor endowments
- Demand Conditions
- Related and supporting industries
- Firm strategy, structure and rivalry
What is in Porters Diamond
- Factor endowments
- Demand Conditions
- Related and supporting industries
- Firm strategy, structure and rivalry
What is Factor Endowments
A nations position in factors of production
What are the two types of endowments
Basic and Advanced Factor Endowments
What are the characteristics of the basic factor endowment
Basic factors present a countries: Natural Resources, Climate, Geographic location and Demographics
What does the basic factor provide?
Provides an initial advantage
What does the basic factor have to support?
By advanced factors to maintain success
What are the characteristics of Advanced Factor Endowments
Communications, Skilled labor, research, technology, education
What does demand create?
Creates capabilities, sophisticated and demanding consumers
What does demand impact?
quality and innovation
What does the related and supporting industries entail?
Creates clusters to support industries that are internationally competitive, they must also meet requirements of other parts of the diamond
What does the Firm Strategy, Structure and Rivalry entail?
It showcases long term corporate vision as a determinant of success, management ideology and structure of the firm can either help or hurt you 7 the presence of domestic rivalry improves a company’s competitiveness
What are Porter’s Theory Predictions?
Should predict patterns of international trade based on our observations in the real world
What do countries have to do relating to his diamond?
Countries should be exporting products from industries where all the four components of the diamond are favorable, while import areas where the components are not favourable
What are the different types of implications for businesses
- Location Implications
- First Mover Implications
- Policy Implications
What is location implications?
Production activities should be dispersed to countries where they can be performed most efficiently
What is First Mover implications?
Invest financial resources in building a first mover or early mover advantage
What are policy implications?
Promote free trade in the best interest of the home country, not in the best interest of the firm even though many firms promote open markets
