GEB+3373+S2011+PP+Ch02+E-book-2

GEB+3373+S2011+PP+Ch02+E-book-2 - Chapter 2 Trading...

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1 Chapter 2 Trading Internationally GEB 3373, Spring 2011 1
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2 GEB 3373, Spring 2011 2 Classical Trade Models s Classical Trade Theory helps managers and government policymakers focus on three important questions: - What products should be imported and exported? - How much should be traded? - With whom should we trade?
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3 GEB 3373, Spring 2011 3 Classical Trade Models s The Classical Trade Theories we will look at are: Mercantilism u Neomercantilism Absolute Advantage Comparative Advantage u Theory of Country Size u Factor Proportions Theory
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4 GEB 3373, Spring 2011 4 Classical Trade Models Mercantilism A country’s wealth is measured by its holdings of treasure, usually in the form of gold s Countries should export more than they import - Implies that a favorable trade balance is good - Trade is a zero-sum game
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5 GEB 3373, Spring 2011 5 Classical Trade Models Neomercantilism The more recent strategy of countries that use protectionist trade policies in an attempt to run favorable balances of trade and/or accomplish particular social or political objectives.
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6 GEB 3373, Spring 2011 6 Classical Trade Models Absolute Advantage According to Adam Smith, a country’s wealth is based on its available goods and services rather than on gold s Natural Advantage - climate and natural resources s Acquired Advantage - technology and skill development
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7 GEB 3373, Spring 2011 7 Fig. 6.2: Production Possibilities with Absolute Advantage
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8 GEB 3373, Spring 2011 8 Classical Trade Models Comparative Advantage Gains from trade will occur even in a country that has absolute advantage in all products because the country will give up less efficient output to produce more efficient output Least Absolute disadvantage is a comparative (relative) advantage
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9 GEB 3373, Spring 2011 9 Fig. 6.3: Production Possibilities with Comparative Advantage
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10 GEB 3373, Spring 2011 10 Classical Trade Models Absolute Advantage and Comparative Advantage are knows as Theories of Specialization
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11 GEB 3373, Spring 2011 11 Classical Trade Models Some assumptions of the Theories of Specialization s There is full employment in the economy High unemployment negates this assumption s Countries want to maximize economic efficiency Countries goals may not be limited to economic efficiency s Countries want to gain relatively as well as absolutely May forego absolute gains if other country is relatively better off
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12 GEB 3373, Spring 2011 12 Classical Trade Models s Full employment of resources s Exclusive pursuit of economic efficiency objectives s Equitable division of gains from specialization. s Only two countries and two commodities s No transport costs s A static rather than a dynamic view s Exclusion of services s Restricted factor mobility
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13 GEB 3373, Spring 2011 13 Theories Explaining Patterns of Trade: Country Size, Factor Proportions, Country Similarity The theories of country size, factor proportions, and country similarity all contribute to the explanations of: s what types of products are traded s with which partner nations countries will primarily trade
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This note was uploaded on 02/12/2011 for the course GEB 3373 taught by Professor Crum during the Spring '10 term at University of Florida.

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GEB+3373+S2011+PP+Ch02+E-book-2 - Chapter 2 Trading...

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