CH02sguide - 2 ChapterObjectives 1 To identify economic...

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Chapter Objectives 1. To identify economic motives for companies to sell their goods and services to foreign customers. 2. To discuss benefits of open trade and reasons for protectionism. 3 To list and discuss the types of world and regional economic cooperation. 4. To classify economic motives for companies to invest abroad so that successful foreign investments can be isolated. 5. To describe how to incorporate foreign trade and investment theories into a single theory of international involvement. Chapter Outline I. Motives for Foreign Trade A. One of man’s most important tasks is to seek the new knowledge necessary to bridge the gap between desires and resources i. The traditional view of the economic man is that he allocates his scarce resources between competing uses in the most economical manner possible. ii. Nations, like men, also face this issue. B. Nations are now economically interdependent and this leads to the advantage of specialization. i. Specialization of function or division of labors allows each nation to leverage differences in skills and resources in the most economical manner. This results in a greater amount of goods and services. The reasons for this are: 1. Natural talents among people are different and specialization allows people to focus on their talents. Motives for World Trade and Investment 13 2 Motives for World Trade and Foreign Investment
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2. Specialization allows a focus on one task leading to improved skills and techniques through repetition and learning. 3. The simplification of function through specialization leads to mechanization. 4. No time is lost shifting from one task to another. C. Theory of Comparative Advantage i. This theory assumes that all countries are better off if each specializes in the production of those goods that it can produce more efficiently and buys those goods that other countries produce more efficiently. ii. The theory assumes two elements: 1. Factors of production (e.g. land, labor, capital, technology) are unequally distributed among nations. 2. Efficient production of various goods and services requires a combination of different resources and the use of different technologies. a. These factors will change over time. D. Theory of Factors Endowments i. This theory states that countries are mutually benefited if they specialize in the production of those goods that use a large amount of abundant factors and trade those goods. 1. Simply, it exports what is has a lot of, imports was it does not. ii. This theory is founded on the idea that the more abundant the supply of any factor, the lower the cost of that factor. Therefore, countries with a large supply of a factor, can use that factor more efficiently. 1.
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This note was uploaded on 01/29/2012 for the course ECONOMICS 3400 taught by Professor Kroger during the Spring '11 term at Georgia State.

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CH02sguide - 2 ChapterObjectives 1 To identify economic...

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