International_Trade_Theory

International_Trade_Theory - Chapter 5 International Trade...

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Basic Marketing – Chapter 6 Chapter 5 Chapter 5 International Trade Theory 5-2 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 5-3 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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Basic Marketing – Chapter 6 5-4 Mercantilism { Mercantilism (mid-16 th century) asserted that it is in a country’s best interest to maintain a trade surplus, to export more than it imports { it advocated government intervention to achieve a surplus in the balance of trade { it viewed trade as a zero-sum game (one in which a gain by one country results in a loss by another) { Mercantilism is problematic and not economically valid, yet many political views today have the goal of boosting exports while limiting imports by seeking only selective liberalization of trade 5-5 Absolute Advantage { In 1776, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game and argued that countries differ in their ability to produce goods efficiently, and 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 5-6 Absolute Advantage The Theory of Absolute Advantage
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Basic Marketing – Chapter 6 5-7 Absolute Advantage Absolute Advantage and the Gains from Trade 5-8 Comparative Advantage { In 1817, David Ricardo explored what might happen when one country has an absolute advantage in the production of all goods { According to Ricardo’s theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the
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This note was uploaded on 10/17/2011 for the course ECON 101 taught by Professor Thompson during the Spring '11 term at Michigan State University.

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International_Trade_Theory - Chapter 5 International Trade...

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