International Trade Theory Summary


argue that its in a country's best interests to run a balance-of-trade surplus (exports exceed imports)
trade -> zero-sum game (country A gain = other country loss)
imperialism, tariffs and subsidies on traded goods to achieve that goal.

Theory of Absolute Advantage

countries differ in ability to produce goods efficiently
- country should specialize in producing goods in areas where it has AA and import other goods from other countries that have AA

Theory of Comparative Advantage

- country should specialize in producing goods it can produce most efficiently
- buy goods it produces less efficiently from other countries
- buying from other countries EVEN IF can produce more efficiently itself

Comparative Advantage & Free Trade

- opening to unrestricted free trade -> increased world production, if positive-sum game (no wins at someone else's expense)
- opening to free trade stimulates economic growth -> dynamic gains (accelerate economic growth) from trade (there is empirical ev

Heckscher-Ohlin Theory

- pattern of international trade determined by differences in factor endowments
- countries will export goods that make intensive use of locally abundant factors
- import goods that make intensive use of factors that are locally scarce

Product Life-Cycle Theory

Trade patterns are influenced by where a new product is introduced
cuz globalised: product life-cycle less predictive than it used to be

New Trade Theory

(1) there are gains to be made from specialization and increasing economies of scale (lowers cost of producing goods)
(2) the companies first to market can create barriers to entry
(3) government may play a role in assisting its home companies
(4) consume

strategic trade policy

promoted by some new trade theorists
government using subsidies might be able to increase chances of domestic firms becoming first movers

Porter's Theory of national competitive advantage

Suggests that pattern of trade influenced by 4 attributes of a nation:
(1) factor endowments
(2) domestic demand conditions
(3) related and supporting industries
(4) firm strategy, structure and rivalry

Why are theories of international trade important to an individual business firm?

helps firm decide where to locate its various production activities

International Trade & Government Policy

Firms involved in intl. trade can & do exert strong influence on gov. policy towards trade.
By lobbying gov, firms can promote free trade/trade restrictions