Hill_Chap_5_edit0708 - Chapter 5 International Trade Theory...

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Chapter 5 International Trade Theory
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5-2 An Overview Of Trade Theory Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country
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5-3 The Benefits Of Trade Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself International trade allows a country: to specialize in the manufacture and export of products that it can produce efficiently import products that can be produced more efficiently in other countries
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5-4 The Patterns Of International Trade Some patterns of trade are fairly easy to explain - it is obvious why Saudi Arabia exports oil, Ghana exports cocoa, and Brazil exports coffee But, why does Switzerland export chemicals, pharmaceuticals, watches, and jewelry? Why does Japan export automobiles, consumer electronics, and machine tools?
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5-5 Trade Theory And Government Policy Mercantilism makes a crude case for government involvement in promoting exports and limiting imports Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade New trade theory and Porter’s theory of national competitive advantage justify limited and selective government intervention to support the development of certain export-oriented industries
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5-6 Mercantilism Mercantilism suggests that it is in a country’s best interest to maintain a trade surplus -- to export more than it imports Mercantilism advocates government intervention to achieve a surplus in the balance of trade It views trade as a zero-sum game - one in which a gain by one country results in a loss by another
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5-7 Absolute Advantage Adam Smith argued that a country has an absolute advantage in the production of a product when it 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 the goods produced by other countries
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5-8 Absolute Advantage Assume that two countries, Ghana and South Korea, both have 200 units of resources that could either be used to produce rice or cocoa In Ghana, it takes 10 units of resources to produce one ton of cocoa and 20 units of resources to produce one ton of rice So, Ghana could produce 20 tons of cocoa and no rice, 10 tons of rice and no cocoa, or some combination of rice and cocoa between the two extremes
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5-9 Absolute Advantage In South Korea it takes 40 units of resources to produce one ton of cocoa and 10 resources to produce one ton of rice So, South Korea could produce 5 tons of cocoa and no rice, 20 tons of rice and no cocoa, or some combination in between Ghana has an absolute advantage in the production of cocoa South Korea has an absolute advantage in the production of rice
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5-10
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Hill_Chap_5_edit0708 - Chapter 5 International Trade Theory...

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