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02.06.08 - Chapter 3 Theories of International Trade and...

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Chapter 3 - Theories of International Trade and Investment International Trade Theory - Look at why trade happens - lots of ideas - Still coming up with ideas - economists at work - no one explanation - mercantilism - trade for treasure & promote surpluses - had trade to build up power - concept of domination and control - initial reason why trade happened - old fashioned and modern simultaneously - absolute advantage - Adam Smith - can do something better than someone else - made sense to trade something they were doing better than someone else so wanted to make money over it - Invisible hand of the Market - Scottish Philosopher at the time of nobility ruling England - consumer’s rights vs. Mercantilists rights of the producer - market place should decide what was the correct way to trade - relative or comparative advantage - Ricardo - maximum benefit not necessarily the best - do what you do better even if better at both - factor endowment - Heckscher-Ohlin - use what you have relative abundance of in your products - if you have an abundance - use that abundance to make that natural resource [example: capital] - not always the case (Leontief Paradox) - even though you have abundance of something - they still produce something that doesn’t make sense, not necessary Introducing Money - For additional complexity, add money - more in Ch. 5 & 11 - Exchange Rate - the price of one country’s currency stated in terms of the other - exchange rates aren’t fixed, they float around each other - price of one compared to another can move up or down - Currency devaluation - on purpose - our currency is worth less, suddenly - then imports cost more - this discourages imported products by 20 or 30 percent - devaluation is a solution to making imports more expensive and our products [exports] less expensive outside of the market - not necessarily a long term strategy - Let currency float - the marketplace decides if items are worth it
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- Pressure for China to do so from all directions - China’s currency if fixed to the US dollar at a fixed rate - makes Chinese goods less and less expensive around the world Newer Explanations of the Direction of Trade - Economies of Scale and the Experience Curve - based on the premise that if we can get certain production volumes the demand goes up - First Mover Theory - first one to offer product if we go into a country before someone else we will capture people’s minds on what this product is and where it is available and how much it costs - a lot of energy put in to tell customers about what the product is about - the cost is so severe that you don’t gain anything by it [if you waste too much time and money] - National Competitive Advantage - Michael Porter at work - International Product Life Cycle - things move - something is introduced in one country goes through growth, sold in another, eventually it is manufactured in another country and then product is made and comes back to initial country - The Linder Theory of Overlapping Demand - people with similar incomes will want the same type items - Fueled by global communications and advertising and brands and
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