Chapter 5: International Trade Theories An Overview of Trade Theory Adam Smith and laisse-faire (invisible hand) Mercantilism: we should encourage exports and discourage imports The Benefits of Trade it is beneficial for a country to engage in international trade even for products it is able to produce for itself gains arise because international trade allows country to specialize in export of products that can be produced more efficiently in that country wile importing products that can be produced more efficiently in other countries tariffs on textiles were abolished for member WTO countries in 2005 The Pattern of International Trade Ricardo’s theory of CA explains specialization in terms of international differences in labour productivity H-O emphasizes interplay between proportions in which Fs of P are available in different countries and the proportions in which they are needed for producing particular goods Product life-cycle theory: early in their life cycle, most products are produced/ exported in country that developed it, then as it become more widespread nationally, production begins in other countries Paul Krugman, new trade theory: in some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can only support a limited number of firms Porter: country factors are important to explain a nation’s dominance in the production and export of particular products Trade Theory and Government Policy Mercantilism promotes exports limiting imports Smith, Ricardo, and H-O make case for unrestricted free trade Argue that controls result in wasted resources New trade and Porter theory: limited government intervention to support development of export-oriented industries Mercantilism Principal assertion: gold and silver are mainstays of national wealth and essential to vigorous commerce Government intervention to achieve trade surplus Hume pointed out inconsistency: A has surplus with B, leads to inflow of gold and silver generating inflation in A, prices would fall in B as money supply there contracts, change in
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- Fall '11
- International Trade, New trade theory, product life-cycle theory