Chapter 6 Trade Theory ●What are the major theories that explain trade between countries? ○Mercantilism- it was in a country's best interests to maintain a trade surplus, to export more than it imported ■A zero-sum game is one in which a gain by one country results in a loss by another ○Absolute Advantage- when production of a product is more efficient than any other country in producing it ■according to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for those produced by other countries. ○Comparative advantage ■Ricardo's theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself ■basic message of the theory of comparative advantage is that potential world production is greater with unrestricted free trade than it is with restricted trade ■suggests that consumers in all nations can consume more if there are no restrictions on trade ■trade is a positive-sum game in which all countries that participate realize economic gains ■Heckscher-Ohlin theory argued that comparative advantage arises from differences in national factor endowments.22By factor endowmentsthey meant the extent to which a country is endowed with such resources as land, labor, and capital. Nations have varying factor endowments, and different factor endowments explain differences in factor costs ■Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce ○International Trade Theories ■Product life-cycle ●As the market in the United States and other advanced nations matures, the product becomes more standardized, and price becomes the main competitive weapon. As this occurs, cost considerations start to play a greater role in the competitive process. Producers based in advanced countries where labor costs are lower than in the United States (e.g., Italy and Spain) might now be able to export to the United States. If cost pressures become intense, the process might not stop there. The cycle by which the United States lost its advantage to other advanced
countries might be repeated once more, as developing countries (e.g., Thailand) begin to acquire a production advantage over advanced countries. Thus, the locus of global production initially switches from the United States to other advanced nations and then from those nations to developing countries. ●Vernon's theory may be useful for explaining the pattern of international trade during the period of American global dominance, its relevance in the modern world seems more limited ■New Trade Theory ●
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- Spring '08
- International Trade, IB 350 Test 2 Review Notes