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Ch 6 - International Trade & Investment Theory (2)

Ch 6 - International Trade & Investment Theory (2) -...

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CHAPTER 6 INTERNATIONAL TRADE & INVESTMENT THEORY International Trade: Trade: voluntary exchange of goods, services, assets, or money between one person or organization and another International trade: trade between residents of two countries Largest component of international trade = travel & tourism Sources of the World’s Merchandise Exports (2001) Classical Country-Based Trade Theories: Mercantilism: o A country’s wealth is measured by its holdings of gold and silver o A country’s goal should be to enlarge holdings of gold and silver by Promoting exports Discouraging imports o Modern Mercantilism: aka Neomercantilists or protectionists American Federation of Labor-Congress of Industrial Organizations Textile manufacturers Steel companies Sugar growers Peanut farmers o Disadvantages of Mercantilism: Confuses the acquisition of treasure with the acquisition of wealth Weakens the country because it robs individuals of the ability To trade freely To benefit from voluntary exchanges Forces countries to produce products it would otherwise not in order to minimize imports Absolute Advantage: o Export those goods and services for which a country is more productive than other countries o Import those goods and services for which other countries are more productive than it is o EXAMPLE: o Design Flaw: if one country has an absolute advantage in both products = NO trade would occur o Absolute vs Comparative Advantage Theory: Absolute versus relative productivity differences 37% 12% 7% 4% 40% European Union United States Japan Canada Other countries
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