Question 1: Synopsis of Trade Theories
A political and economic policy seeking to advance a state above others
by accumulating large quantities of precious metals and by exporting in large quantity while
importing in small.
The name for the ability of one entity to engage in more efficient
production than another entity. Assuming equal inputs, the entity with an absolute advantage
will have a greater output.
the ability of one business entity to engage in production at a
lower opportunity cost than another entity. Comparative advantage, rather than absolute
advantage, is useful in determining what should be produced and what should be acquired
differences in relative factor endowments among nations underlie
the basis for trade
Product Life-Cycle Theory: This theory states how a country's export can later become its
import through different stages in the product life cycle; New Product stage, Maturing
Product stage and Standardized Product stage
New Trade theory:
is the economic critique of international free trade from the perspective
of increasing returns to scale and the network effect
National competitive advantage:
attempts to analyse the reasons for a nation’s success in a
particular industry through factor endowments, demand conditions, related industries and
firm strategy, structure and competition.
The Concertina Model
: is an international trade model in international economic trade
theory as a means of moving away from high-tariffs towards free trade
Increasing-returns trade theory:
asserts that a nation can develop an industry that has
economies of scale, produce that good in great quantity at low average unit costs, and then
trade those low-cost goods to other nations.
Question 3: Pros and Cons of Bilateral Free Trade Agreement
The free trade argument is, in principal persuasive. It states that if each nation produces what
it does best and permits trade, over the long run all will enjoy lower prices and higher levels
of output, income, and consumption than could be achieved in isolation. In a dynamic world,
comparative advantage is constantly changing due to shifts in technologies, input
productivities, and wages, as well as tastes and preferences. A free market compels
adjustment to take place.
Often proponents of protectionism say that free trade is fine in theory, but it does not apply in
the real world.
Job protection, protection against cheap foreign labour, fairness in trade,
maintenance of domestic standard of living, infant industry argument, are just some of the
issues FTA fail to satisfy.
(incorporate each of the three points pro and cons in the
The underlying rationale FTA is the belief that international trade is a win-win proposition.
This belief is based on theories developed by theorists such as Adam Smith and David