Week 5 Discussion Trade Deficits 2

Week 5 Discussion Trade Deficits 2 - instead they have a...

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Theories of international trade include mercantilist theory, absolute advantage, comparative advantage, and factor endowments. Mercantilist theory says that exporting is good (currency is received), but importing should be avoided. The cons of this theory is that is does not acknowledge that some importing is good. The absolute advantage says that countries should focus on producing what they have the best advantage in. The idea may be that each country will have a specific thing they do best to use as trade, however in reality this does not really happen. Comparative advantage trade is when countries will trade without the absolute advantage;
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Unformatted text preview: instead they have a comparative advantage. This type of trade occurs when the relative cost is different between the two countries. This is actually described as a beneficial approach to trade. Factor endowments simply means that a country should export items made from materials that they have an abundance of, and import items that are made of items that are scarce in that country. This seems like a fairly logical approach to me. Source: http://www.witiger.com/internationalbusiness/tradetheories.htm...
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