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Chapter 5a International Trade Theory

Chapter 5a International Trade Theory - Chapter 5 Chapter...

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Chapter 5 Chapter 5 International Trade Theory
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5-2 Introduction International trade theory explains why it is beneficial for countries to engage in international trade helps countries formulate their economic policy explains the pattern of international trade in the world economy
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5-3 An Overview of Trade Theory Question: What is free trade? 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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5-4 An Overview of Trade Theory Question: How has international trade theory evolved? Mercantilism (16 th and 17 th centuries) promoted the idea of encouraging exports and discouraging imports In 1776, Adam Smith promoted the idea of unrestricted free trade In the 19 th century, David Ricardo built on Smith ideas, and in the 20 th century, Eli Heckscher and Bertil Ohlin refined Ricardo’s work
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5-5 The Benefits of Trade Question: Why is it beneficial for countries to engage in free trade? The theories of 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 can be produced most efficiently in that country, and import products that can be produced more efficiently in other countries
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5-6 The Pattern of International Trade International trade theory helps explain trade patterns 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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5-7 The Pattern of International Trade Ricardo’s theory of comparative advantage suggests that existing trade patterns are related to differences in labor productivity Heckscher and Ohlin’s theory explains trade through the interplay between the proportions in which the factors of production are available in different countries and the proportions in which they are need for producing particular goods Ray Vernon suggested that trade patterns could be explained by looking at a product’s life cycle
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5-8 The Pattern of International Trade Paul Krugman developed new trade theory which suggests that the world market can only support a limited number of firms in some industries, and so trade will skew toward those countries that have firms that were able to capture first mover advantages Michael Porter focused on the importance of country factors to explain a nation’s dominance in the production and export of certain products
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5-9 Trade Theory and Government Policy While the theories all suggest that trade is beneficial, they lack agreement in their recommendations for government policy
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