Chapter%2003 - 3 Theories of International Theories of...

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Unformatted text preview: 3 Theories of International Theories of International Trade and Investment Trade and Investment McGraw-Hill/Irwin This chapter covers: Why goods are traded internationally Arguments for imposing trade restrictions Kings of import restrictions Weakness of GNP/capita as economic indicator Characteristics of developing nations Theories of foreign direct investment Chapter Objectives Chapter Objectives Understand the theories of international trade. Comprehend the arguments of imposing trade restrictions. Explain the two basic kinds of import restrictions. Appreciate the relevance of the changing status of tariff and non tariff barriers. Recognize the weaknesses of GNP/capita as an economic indicator. Understand the new definition of economic development. Understand why governments change from import substitution to export promotion. Explain some of the theories of foreign direct investment. 3-2 International Trade Theory International Trade Theory Mercantilism Believed nations welfare was in accumulation of stock of precious metals. Trade surplus created by import restrictions and government subsidies to exporters. Mercantilist era ended in 1700s. 3-3 Modern Day Mercantilism Modern Day Mercantilism Economic Nationalism Industrial policy based on state intervention France nationalized key industries and banks to use the power of the state as Stockholder and financier Customer and marketer to revitalize the nations base In 1986, little growth and high unemployment led government to reverse mercantilist policy Japan called fortress of mercantilism by some Nearly impenetrable market Effort to maintain a cheap yen 3-4 Theory of Absolute Advantage Theory of Absolute Advantage The capacity of one nation to produce more of a good with the same amount of input than another country. Adam Smith claimed that market forces, not government controls should determine the direction, volume, and composition of international trade. Each nation should specialize in producing goods it could produce most efficiently In absolute advantage, both nations would gain from trade. Assumptions Perfect competition and no transportation costs in a world of two countries and two products. 3-5 Theory of Comparative Advantage Theory of Comparative Advantage A nation having absolute disadvantages in the production of two goods compared to another nation, has a comparative advantage in producing the good in which its absolute disadvantage is less. Theory of comparative advantage demonstrated by Ricardo in 1817....
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This note was uploaded on 06/16/2009 for the course BUSINESS 4444 taught by Professor Dr.dale during the Spring '09 term at University of Texas at Dallas, Richardson.

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Chapter%2003 - 3 Theories of International Theories of...

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