Trade theory

Question 1

Why does international trade occur? (4)

Answer 1

1. can benefit both parties
2. improve competitiveness
3. exports can help the economy of a country
4. imports provide:
   - higher quality
   -less expensive products
   -more quantity

Question 2

Describe the early country-based theories (3)

Answer 2

1. Focused on the individual country
2. useful to describe trade in commodities (ex: gold, wheat)
3. price is an important factor in the customer’s purchase decision

Question 3

Describe the modern firm-based theories (3)

Answer 3

1. focus on the firm’s role in promoting international trade
2. useful to describe trade in differentiated goods (ex: cars, smartphones)
3. brand name is an important factor in the customer’s purchase decision)

Question 4

Explain the difference between interindustry and intraindustry trade

Answer 4

Interindustry trade: different industries
Intraindustry trade: same industry

Question 5

Explain the four country-based theories

Answer 5

1. Mercantilism: country’s wealth is measured by gold and silver. Promotes exports but not imports
2. Absolute advantage: full specialization
3. Comparative advantage: you’re better than everyone, but choose what you’re better at
4. Relative factor endowments (Hecksher-Ohlin) : a country will have a competitive advantage if it uses resources it has in abundance

Question 6

Explain the two modern firm-based theories

Answer 6

1. Linder’s Country similarity theory: most trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry trade will be common.
2. New trade theory: economies of scale occur if a firm’s average cost of producing a good decreases as its output increases.

Question 7

Describe the two types of international investments

Answer 7

1. Foreign Portfolio Investment (FPI): passive investments (buy stocks, bonds)
2. Foreign Direct Investments (FDI):
   decision making (buy business/assets0

Question 8

Describe and explain the two main political factors affecting the FDI decision

Answer 8

1. Avoidance of Trade Barriers: build foreign facilities to avoid tariffs on imported consumer goods
2. Economic Development Incentives: financial tools that governments, utilities, and other organizations use to encourage businesses to relocate, create jobs, or invest in a community. ( make it in my region, get my money)