Chptr 7- International trade theory- Exam 2 MGT Flashcards
free trade
a situation where a gov does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country
- if we trade with one another, everyone wins
mercantilism/protectionism (mid 16th century)
all the reasons why governments intervene in markets (opposite of free trade)
- in country’s best interest to maintain a trade surplus (export more than it imports)
- trade as a zero sum game (one in which a gain by one country results in a loss by another)
why countries trade with each other
international trade allows a country to:
- specialize in the manufacture and export of products and services that it can produce efficiently
- to import products and services that can be produced more efficiently in other countries
recognize and explain why nations trade with each other
- increase access to higher quality, lower priced goods, means growth (reduces input costs which reduces businesses production costs and promotes economic growth
- improves efficiency and innovation. (shifts worker and resource to productive uses), drives competitiveness, promotes fairness
absolute advantage (1770s) Adam smith
climate and natural resource explanations (Africa having diamonds) to have absolute advantage compared to another country
comparative advantage (mid 1800s)
explanation in labor productivity and efficiency development (country’s have a choice, they can choose to specialize)
- for ex. India specializing in and having amazing call centers, Bangladesh provides worlds textile workers)
- not that other countries couldn’t provide, but countries chose to specialize
Heckscher-Ohlin (1933)
proportion of factor endowments (land, labor, and capital)
- those elements set what you produce, not so much of a choice
- US exporting wheat
Product Life Cycle theory
- new products are produced in and exported from the country they were developed
- wealthier countries like US innovate and come up with product, product gains acceptance in global markets, production of that good outsources to lower cost countries
- for ex: solar power (photovoltaic cells) produces first in US, and now more popular China produces because they have a lower cost of labor
new trade theory
- certain industries can support only a limited firms (first mover advantage)
- based on luck, and innovation working together to create opportunities for first movers
- for example bowing (airlines)
- japan exporting automobiles
new trade theory
- certain industries can support only a limited firms (first mover advantage)
- based on luck, and innovation working together to create opportunities for first movers
- for example bowing (airlines)
- japan exporting automobiles
porters diamond of competitive advantage
looks at what makes country more competitive in the production of a specific good (what drives competition)
- (see notes for diagram)
why economists believe unreestricted free trade is good
- with competition, better variety and reduced cost
- economies of scale and first-mover advantage
- implications of new trade theory: a company may dominate an export because it was lucky enough to have firm who were the first to produce the product
first mover advantages
the economic and strategic advantages that accrue to early entrants into an industry and the world can only support a few companies
- for some industries there can only be a couple of manufacturers (for boeing producing jet fule)
with first mover advantage, be mindful of:
- location- counties have advantages in different productive activities (global web of productive activities)
- gov policies
samuelson critique
- look through lens of mercantilism
- free trade doesn’t make sense bc wealthier nations lose jobs to lower cost nations and that savings is not made up in lower cost goods
- lose jobs to outsourcing (moving production to lower cost place) never makes up for it with lower cost goods
