International trade theory (topic 12)

Question 1

International trade

Answer 1

The exchange of capital, goods, technology, and services across international borders/territories.

Question 2

Country-based trade theories

Answer 2

Country is the unit of analysis, explains inter-industry trade. Includes: mercantilism, neomercantilism, absolute advantage, comparative advantage, theory of country size, country-similarity theory, factor-proportions theory (related to comparative advantage).

Question 3

Firm-based trade theories

Answer 3

Firm is the unit of analysis. Includes: product life cycle (Vernon, 1960), National competitive advantage (Michael Polcher, 1980).

Question 4

Interventionist

Answer 4

Governments intervene to restrict certain types of trade. Includes: mercantilism, neomercantilism.

Question 5

Laissez-faire

Answer 5

Market forces are allowed to determine trading relations between countries. Includes: absolute advantage, comparative advantage.

Question 6

Mercantilism

Answer 6

This theory proposes that it is in the interest of a country to achieve a favourable balance-of-trade (i.e. export more than it imports) to generate trade surpluses in order to accumulate ‘treasure’.

Question 7

Neomercantilism

Answer 7

Advocates a favourable balance of trade, promoting exports and limiting imports in order to boost foreign exchange reserves and increase domestic employment, amongst other things.

Question 8

Mercantilism

Answer 8

This theory proposes that it is in the interest of a country to achieve a favourable balance-of-trade (i.e. export more than it imports) to generate trade surpluses in order to accumulate ‘treasure’.
(Interventionist)

Question 9

Neomercantilism

Answer 9

Advocates a favourable balance of trade, promoting exports and limiting imports in order to boost foreign exchange reserves and increase domestic employment, amongst other things.
(Interventionist)

Question 10

Absolute advantage (Adam Smith, 1776)

Answer 10

Argues for specialisation through free trade because consumers will be better off buying foreign-made products priced more cheaply than domestic ones. Founded on the benefits of economic specialisation.
Holds that the market would reach an efficient end by itself - government intervention is counter-productive.
(Laissez-faire)

Question 11

Comparative advantage (David Ricardo, 1817)

Answer 11

Argues for specialisation through free trade based on the belief that total global output can increase even if one country has an absolute advantage in the production of all products. Founded on the benefits of economic specialisation.
It makes sense for a country to specialise in the production of those goods and services it can produce most efficiently, and to buy the goods it produces less efficiently from other countries, even if this means importing goods it could produce more efficiently itself.
(Laissez faire)
Can also arise from natural advantages - fertile land, abundant materials, favourable climate.

Question 12

Trade

Answer 12

The reallocation of resources, leading to winners and losers.

Question 13

Trade pattern theories

Answer 13

theory of country size; country-similarity theory; PLC theory; factor-proportions theory; Porter’s Diamond of National Advantage.

Question 14

Theory of country size

Answer 14

Advocates that large countries usually depend less on trade than smaller ones.
Criticism: doesn’t account for the fact that not all of the land area of a country is appropriate for production (e.g. cold climates, mountains, areas of small population, etc.)

Question 15

Country-similarity theory

Answer 15

The theory that a country will seek to exploit opportunities in those countries most similar to its home country because of the perceived need to make fewer operating adjustments.

Question 16

Factor proportions theory (Heckscher, 1919; Ohlin, 1933)

Answer 16

The theory that differences in a country’s proportionate holdings of factors of production (land, labour, capital) explain differences in the costs of the factors and that export advantages lie in the production of goods that use the most abundant factors.

Question 17

Capital-intensive countries

Answer 17

More efficient in producing capital-intensive goods.

Question 18

Labour-intensive countries

Answer 18

More efficient in producing labour-intensive goods.

Question 19

Product life cycle theory (Vernon, 1966)

Answer 19

The theory that certain kinds of products go through a cycle consisting of four stages (introduction, growth, maturity, and decline) and that the location of production will shift internationally depending on the stage of the cycle.
Criticism: production of many types of goods often remains in the innovating country, due to high transportation costs, short product life cycles, consumers are not price sensitive (therefore lower production costs and lower prices are not necessary), companies may be able to meet customer demand without competing on price.

Question 20

Porter’s Diamond of National Advantage (1990, 1998)

Answer 20

A theory that says that countries usually need four conditions (demand; factors; related and supported industries; and strategy, structure, and rivalry) to develop and sustain a product’s competitive advantage.
Criticism: domestic existence of all factors does not guarantee a particular industry will develop; the success of many firms is stimulated by foreign demand and export-led growth as opposed to domestic demand; factors of production can be imported from abroad; companies also react to foreign-based rivals.