Trade theories Flashcards
(26 cards)
What is mercantilism, and when did it dominate economic thought?
Mercantilism was a dominant economic philosophy during the 17th and 18th centuries, advocating that a country should export more than it imports to accumulate gold and silver and strengthen national power.
What were the key principles of mercantilism?
- Exports should exceed imports.
- Trade surpluses lead to gold and silver inflows.
- Governments should heavily regulate trade with import restrictions and export incentives.
How did mercantilists measure a nation’s wealth?
Wealth was measured by the stock of precious metals (gold and silver) rather than by total productive resources like human capital and natural resources, which are the modern measures of wealth.
What was the main flaw in mercantilist thinking?
Mercantilism viewed trade as a zero-sum game, meaning one country could only gain if another lost. However, modern trade theory shows that trade is mutually beneficial.
Does mercantilism still exist today?
While classical mercantilism declined, neo-mercantilism exists today, where governments subsidize exports, impose tariffs, and use protectionist policies to protect domestic industries and employment.
What is Adam Smith’s theory of absolute advantage?
A country has an absolute advantage if it can produce a good more efficiently (using fewer resources) than another country.
What did Adam Smith argue about free trade?
He argued that free trade maximizes global wealth by allowing countries to specialize in producing goods where they have an absolute advantage.
How does absolute advantage lead to specialization?
If one country is more efficient at producing Good A and another at Good B, they should specialize in those goods and trade for mutual benefit.
What is a major limitation of the absolute advantage theory?
It doesn’t explain trade between countries where one nation is more efficient in producing everything, which is where comparative advantage becomes important.
David Ricardo’s comparative advantage
What is the law of comparative advantage?
Even if a nation is less efficient in producing all goods, it should still specialize in the good where it has the smallest absolute disadvantage and trade for the rest.
How does comparative advantage differ from absolute advantage?
Absolute advantage is about efficiency, while comparative advantage is based on opportunity cost—what must be given up to produce another good.
How does opportunity cost determine comparative advantage?
The country with the lower opportunity cost in producing a good has a comparative advantage in that good.
What happens if a country has no comparative advantage in anything?
If a country is equally inefficient in all goods relative to another nation, trade does not benefit either country under this model.
How does money affect comparative advantage?
Even if a country is less efficient in all goods, lower wages can make its goods cheaper in international markets, allowing it to export successfully.
How do exchange rates impact comparative advantage?
If one country’s currency is weaker, its exports become cheaper, enhancing comparative advantage.
What happens if wages in a low-productivity country are too high?
If wages are too high relative to productivity, that country loses competitiveness, and its goods become more expensive, reducing trade potential.
How do wage differences affect trade patterns?
Countries with low wages and moderate productivity often become export hubs, while high-wage, high-productivity nations focus on advanced industries.
What is the labor theory of value, and how does it relate to comparative advantage?
The labor theory states that the value of a good is based only on the labor required to produce it. This theory oversimplifies costs because it ignores factors like capital and technology.
What is opportunity cost in trade?
Opportunity cost is the amount of one good that must be sacrificed to produce an additional unit of another good.
Why is opportunity cost important in trade theory?
It determines which good a country should specialize in by identifying where less is sacrificed for more gain.
How do opportunity costs differ between countries?
Countries with abundant labor may have a low opportunity cost for labor-intensive goods, while countries with high capital investment may have a lower opportunity cost for capital-intensive goods.
Why do some countries still use protectionist policies despite comparative advantage?
Governments protect local industries, jobs, and national security, even if it means reducing overall efficiency.
What industries might be protected despite a lack of comparative advantage?
Agriculture, defense industries, and emerging tech sectors are often protected to maintain self-sufficiency and national security.
How does globalization affect comparative advantage?
Globalization reshapes comparative advantage by allowing companies to outsource production, shifting labor-intensive industries to low-wage countries.
