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CHAPTER 2 MOTIVES FOR WORLD TRADE AND FOREIGN INVESTMENT CHAPTER OUTLINE I. Motives for Foreign Trade a) The theory of comparative advantage (1) Why comparative advantage occurs b) The theory of factor endowments c) Product life-cycle theory d) Other motives for world trade (1) Economies of scale (2) Differences in tastes e) Benefits of Open Trade (1) Allocation efficiency from comparative advantage (2) Increased competition (3) Increased productivity from production efficiency (4) Expanded menu of goods f) Free trade versus protectionism (1) Reasons for protectionism (2) Forms of trade control (3) Tariffs (4) Import quotas (5) Other trade barriers II. Economic Integration a) From GATT to WTO b) Trading blocs: types of economic cooperation c) Regional economic agreements d) European economic area e) North American free trade agreement f) Asian integration efforts d) Corporate response to trading blocs III. Motives for Foreign Investment a) Product life-cycle theory b) Portfolio theory c) Oligopoly model d) Other studies of motives for foreign investment (1) Considerations from the standpoint of investors (2) Considerations from the standpoint of host countries (3) Mixed considerations VI. A Synthesis of Foreign Trade and Investment Theories a) Electric theory VII. Summary 9
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CHAPTER OBJECTIVE This book deals with two closely related topics: international trade and foreign investment. Chapter 2 discusses motives for both international trade and foreign investment. The knowledge and understanding of these motives are essential if we are to appreciate the economic dynamics and policy issues of foreign trade and investment theories. Thus, in this important overview, we examine key trade and investment theories before we consider them separately and more closely in the coming chapters. KEY TERMS AND CONCEPTS Theory of comparative advantage assumes that all countries are better off if each specializes in the production of those goods which it can produce more efficiently and buys those goods which other countries produce more efficiently. Theory of factor endowments says that countries are mutually benefited if they specialize in the production of goods that use a large amount of abundant factors and trade those goods among them. Product life-cycle theory attempts to explain both world trade and foreign investment patterns on the basis of stages in a product's life. Economies of scale take place due to a synergistic effect which is said to exist when the whole is worth more than the mere sum of its parts. Tariffs are duties or taxes imposed on imported commodities. Import quotas specify maximum amounts of certain products to be imported during a given period of time, usually one year. Countervailing duties
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This note was uploaded on 03/22/2009 for the course MANAGEMENT 5689-9856 taught by Professor Nialamnu during the Fall '08 term at Indiana State University .

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