Lecture 5 - 1 Lecture 5 International Trade Theory 2...

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Unformatted text preview: 1 Lecture 5 International Trade Theory 2 Outline A. Overview of Free Trade Theory B. International Trade Theories Mercantilism Absolute Advantage Comparative Advantage Heckscher-Ohlin Theory Product life-cycle Theory New Trade Theory Porters Diamond 3 A. Overview of Free Trade Theory Free Trade A government does not attempt to impose quotas or duties to influence: what its citizens can buy from another country what they can produce and sell to another country The Benefits of Trade allow a country to: specialize in the manufacture and export of products that can be produced most efficiently in that country import products that can be produced more efficiently in other countries 4 A. Overview of Free Trade Theory A Shift to Free Trade While majority of the society gain, some individuals and industries lose (e.g. high unemployment) Examples: International Trade in Information Technology and U.S. Economic Growth Global Business Today: P.155-156 Moving U.S. White-Collar Jobs Offshore Global Business Today: P.169 Trade occurs when overall gains outweigh the losses 5 B. International Trade Theories Early theories are used to explain why unrestricted free trade is beneficial to a country Example: Theory of mercantilism, absolute advantage, comparative advantage and Heckscher-Ohlin Theory Later theories appear to make a case for some limited government involvement to support certain export-oriented industries Example: Product Life Cycle Theory, New Trade Theory and Porters Diamond 6 Mercantilism A nations wealth depends on accumulated treasure. Gold and silver can be used for the currency of trade A countrys best interest is to maintain a trade surplus Export > Import Maximize export through subsidies Minimize imports through tariffs and quotas A surplus in the balance of trade 7 Mercantilism Characteristics of Mercantilism Trade monopolies arose Smuggling flourished Colonial empires were established 8 Mercantilism The Flaw of Mercantilism Trade is a zero-sum game (A gain by one country results in a loss by another) Example: Trade surplus in Country A money supply in Country A inflation in Country A demand in Country A demand in Country B no trade surplus in Country A No one can keep a trade surplus in the long run 9 Absolute Advantage Capability of one country to produce more of a product using the same amount of input A country should produce only goods where it is more efficient at production , and trade for those goods which are relatively not efficiently produced. Trade between countries is, therefore, beneficial 10 Absolute Advantage and the Gain from Trade Resources required to produce 1 ton of cocoa and rice Cocoa Rice Ghana South Korea 10 40 20 10 Production and consumption without trade Cocoa Rice Ghana South Korea Total production 10.0 2.5 12.5 5.0 10.0 15.015....
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This note was uploaded on 11/02/2009 for the course FB AF2602 taught by Professor Aliceshiu during the Winter '08 term at Polytechnic University of Puerto Rico.

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Lecture 5 - 1 Lecture 5 International Trade Theory 2...

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