Exporting
Selling abroad
Importing
Buying from abroad
Merchandise
Tangible products being traded
Services
Intangible services being traded
Trade deficit
An economic condition in which a nation imports more than it exports
Trade surplus
An economic condition in which a nation exports more than it imports
Balance of trade
The aggregation of importing and exporting that leads to the country-level trade surplus or deficit
Six major theories of international trade
1) mercantilism
2) absolute advantage
3) comparative advantage
4) product life cycle
5) strategic trade
6) national competitive advantage of industries
Classical trade theories
The major theories of international trade that were advanced before the 20th century, which consist of (1) mercantilism, (2) absolute advantage, and (3) comparative advantage
Modern trade theories
The major theories of international trade that were advanced in the 20th century, which consist of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage of industries
Theory of Mercantilism
A theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer; It is in a country's best interest to maintain a trade surplus - to export more than it imports; believed in protectionism; v
Protectionism
The idea that governments should actively protect domestic industries from imports and vigorously promote exports; Government should intervene to achieve a surplus in the balance of trade
Free trade
The idea that free market forces should determine how much to trade with little or no government intervention.
Theory of absolute advantage
A theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage; Capability of one country to produce more of a product with the same amount of input than another country; Produce o
Absolute advantage
The economic advantage one nation enjoys that is absolutely superior to other nations
Theory of comparative advantage
A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations
Comparative advantage
Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations
Opportunity cost
Cost of pursuing one activity at the expense of another activity, given the alternatives (other opportunities).
Product life cycle theory (Vernon)
A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles; omparative advantage initially resides with the lead innovation nation and go to others as the product goes through its life cycle stages
Strategic trade theory
A theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success
Subsidy
Government payment to domestic firms
Strategic trade policy
Government policy that provides companies a strategic advantage in international trade through subsidies and other supports
Factor endowment
The extent to which different countries possess various factors of production such as labor, land, and technology
Factor endowment theory (Heckscher-Ohlin theory)
A theory that suggests that nations will develop comparative advantages based on their locally abundant factors
Theory of national competitive advantage of industries (Porter's diamond theory)
A theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a "diamond
Resource mobility
Assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry
Tariff barrier
Trade barrier that relies on tariffs to discourage imports
Import tariff
A tax imposed on imports
Deadweight cost
Net losses that occur in an economy as a result of tariffs
Nontariff barrier (NTB)
Trade barrier that relies on nontariff means to discourage imports
Import quota
Restriction on the quantity of imports
Voluntary export restraint (VER)
An international agreement that shows that exporting countries voluntarily agree to restrict their exports
Local content requirement
A requirement stipulating that a certain proportion of the value of the goods made in one country must originate from that country
Administrative policy
Bureaucratic rules that make it harder to import foreign goods
Antidumping duty
Tariffs levied on imports that have been "dumped" (selling below costs to unfairly drive domestic firms out of business)
Infant industry argument
The argument that if domestic firms are as young as "infants" in the absence of government intervention, they stand no chances of surviving and will be crushed by mature foreign rivals
Adam Smith
Argued in his book Wealth of Nations that specialization increases productivity, and exchange allows for benefits of specialization (Absolute Advantage)
David Ricardo
Wrote The Principles of Political Economy and Taxation and argued that efficiency of resource utilization leads to more productivity; Should import even if country is more efficient in the product's production than country from which it is buying (Compara
Autarky
no trade, poor employment of resources
Trade
Better use of resources; more total output
Assumptions of the Smith-Ricardian theory of trade
Only two countries and two goods
No transportation costs
Countries have similar prices and values
Fixed amounts of resources
No effects on income distribution within countries
What happens to trade if one country has an absolute advantage in both products?
According to a theory of absolute advantage, no trade would occur in "this" circumstance. According to comparative advantage, countries should produce and export those goods and services for which it is relatively more productive than other countries AND
Modern Free Trade Theories
1) Product Life Cycle (Vernon)
2) Porter's Diamond Theory
3) Hecksher-Ohlin Theorem (HOT)
Smith-Ricardian theory of trade
Why countries should trade according to "this" theory: Simple proof that specialization and trade leads to greater overall welfare...
... even if one producer is more productive in all goods! Think of opportunity costs!
The Benefits to Open Trade and Investment
Benefits of "this": win-win situation where From a "free trade" perspective, best not to see world as "us" vs. "them"
Instead, "free trade" theory suggests that everyone is better off over the long run through free trade
Better to open rather than close b
U.S. Trade
Huge trade deficit: value of exports has gone down because we're buying more local (drilling oil domestically; etc) and value of imports has gone down.
Reality of trade
Trade does not always balance (look at US trade), trade patterns (Leontief Paradox)
Leontief Paradox
Based on Hecksher-Ohlin, US should import labor-intensive and export capital-intensive; But the opposite happens: export (skilled labor intensive) software; import capital intensive heavy machinery. This is known as...
Different types of nontariff barriers
Subsidies / 'cheap' exports...In US we subsidize cotton and in Europe they're subsidizing $2 per cow a day)
Trade-related aspects of intellectual property rights (TRIPs); Patent protection is essential to the recovery of R&D costs
Problems with lack of en