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Chapter 5 Student P11

Chapter 5 Student P11 - Chapter5 Upon completion of this...

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Chapter 5 International Trade Theory
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Upon completion of this material, you should be able to: Describe how each of the theories of trade would explain international trade patterns. Identify the transactions posted to each account in balance of payments accounting. Discuss the implications when a nation is running a current account deficit or current account surplus.
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Classic Theories of Trade Mercantilism Absolute Advantage Theory of Comparative Advantage Heckscher-Ohlin Theory
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Contemporary Theories of Trade Product Life-Cycle Theory New Trade Theory National Competitive Advantage  or  Porter’s Determinants of National  Advantage
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Mercantilism Mercantilism contends a country should  strive to maintain a trade surplus by exporting  more than it imports. Countries should maximize exports through  subsidies and minimize imports through  tariffs and quotas. Neo-mercantilism is the notion that imports  are inherently bad for an economy.
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Theory of Absolute Advantage Countries should engage in trade when  they have an absolute advantage in their  ability to a produce good efficiently. A country should produce only goods  where it is most efficient, and trade for  those goods where it is not efficient.
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Theory of Absolute Advantage
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Ricardo’s Theory of Comparative Advantage Demonstrates that countries can benefit from  trade even if a country has an absolute  advantage of production in all products. A country should specialize in the production of  goods that it produces most efficiently and buy  the goods it produces comparatively less  efficiently from other countries. A nation may import products even when it has  an absolute advantage in the production of that  product.
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Ricardo’s Theory of Comparative Advantage
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Immobile Resources Diminishing Returns to Specialization Dynamic Effects and Economic Growth Extensions of the Ricardian Model
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Diminishing Returns
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Dynamic Effects of Free Trade
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Heckscher-Ohlin Theory Purports that differences in factor  endowments and factor costs determine  comparative advantage. Countries should export goods that  intensively use factor endowments which  are locally abundant and import goods  made from locally scarce factors.
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Product Life-Cycle Theory Contends a product evolves through  distinct stages from its introduction to its  withdrawal from the market: Introduction,  Growth, Maturity, and Decline.
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