Exam 2 Study Guide - International Trade and Business...

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International Trade and Business Environment (Econ 300) Exam Review Sheet 2 This exam review sheet should be used along with class notes, homework assignments, readings, and parts of the text emphasized in class. I. Chapter 5 Define international trade Purchase, sale, or exchange of goods and services across national borders Why is trade important? Greater choice of goods and services Important engine of job creation Opens doors to new entrepreneurial opportunity across the globe Some important trade statistics 10% of US jobs depend on exports Foreign companies employ more than 6 million US workers What is the composition of world trade? 80% is merchandise trade o Top merchandise trading countries Germany (cars) China (mass scale) United States 20% is service trade o Top service trade countries United States (R&D) United Kingdom Germany World trade has grown faster than world output What are the current world trade patterns? Two-way trade between low and middle income nations The two-way trade between high and mid/low income economies accounts for 34% of total world trade What is trade dependency? List the pros and cons of trade dependency. Too export oriented Too open to foreign investment Pros Creates jobs 1
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Raises wages Infusion of capital (through ways such as technological improvements) Cons Intertwining of economies Competition from other economies At a fundamental level, why does trade occur? Provides people with greater choices of goods and services Different trade theories Comparative Advantage o Comparing opportunity cost o Value of what is given up Absolute Advantage o Ability to produce a good more efficiently o Creating more outputs using same or fewer number of inputs Hecksher-Ohlin Theory o Countries will produce and export goods that require resources/factors that are abundant and import goods that are short in supply. o EX: Saudi Arabia exports oil and imports everything else o EX: Australia exports minerals and grains and imports consumer goods and capital equipment New Trade Theory o Trade theory stating that there are gains to be made from specialization and increasing economies of scale, the companies first to market can create barriers to entry, and government may play a role in assisting its home companies o (1) Companies who are first to enter market will have first mover
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