Free Trade
Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country. Smith, who proposed free trade, argued that th
Heckscher-Ohlin Theory
The Heckscher-Ohlin theory emphasizes the interplay between the proportions in which the factors of production (such as land, labor, and capital) are available in different countries and the proportions in which they are needed for producing particular go
Explain how the theories of trade differ in terms of their support to governmental intervention.
The theories of Smith, Ricardo, and Heckscher-Ohlin form part of the case for unrestricted free trade. The argument for unrestricted free trade is that both import controls and export incentives (such as subsidies) are self-defeating and result in wasted
What is the main principle of mercantilism?
The main tenet of mercantilism is that it is in a country's best interests to maintain a trade surplus, to export more than it imported. By doing so, a country would accumulate gold and silver and, consequently, increase its national wealth, prestige, and
Identify a major flaw associated with mercantilism.
The flaw with mercantilism was that it viewed trade as a zero-sum game. A zero-sum game is one in which a gain by one country results in a loss by another.
Smith's theory of absolute advantage
A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and
Ricardo's theory of comparative advantage.
According to Ricardo's theory of comparative advantage, it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this
Explain how the principle of diminishing returns weakens the Ricardian model.
Diminishing returns show that it is not feasible for a country to specialize to the degree suggested by the simple Ricardian model outlined earlier. Diminishing returns to specialization suggest that the gains from specialization are likely to be exhauste
Explain the dynamic gains that are generated by opening an economy to trade.
First, free trade might increase a country's stock of resources as increased supplies of labor and capital from abroad become available for use within the country. Second, free trade might also increase the efficiency with which a country uses its resourc
Paul Samuelson's critique
Paul Samuelson's critique looks at what happens when a rich country enters into a free trade agreement with a poor country that rapidly improves its productivity after the introduction of a free trade regime. Samuelson's model suggests that in such cases,
Factor Endowments
Factor endowments refer to the extent to which a country is endowed with such resources as land, labor, and capital. Nations have varying factor endowments, and different factor endowments explain differences in factor costs.
Vernon's product life-cycle theory
Vernon's theory was based on the observation that for most of the twentieth century a very large proportion of the world's new products had been developed by U.S. firms and sold first in the U.S. market. To explain this, Vernon argued that the wealth and
Disadvantage of the product life-cycle theory
Viewed from an Asian or European perspective, Vernon's argument that most new products are developed and introduced in the United States seems ethnocentric and increasingly dated. This is a major disadvantage of the product life-cycle theory.
What are the sources of economies of scale?
Economies of scale are unit cost reductions associated with a large scale of output. Economies of scale have a number of sources, including the ability to spread fixed costs over a large volume, and the ability of large-volume producers to utilize special
Porter's Diamond (4)
(1) Factor endowments (2) Demand conditions (3) Relating and supporting industries (4) Firm strategy, structure, and rivalry
Factor endowments [PD]
a nation's position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry.
Demand Conditions
the nature of home demand for the industry's product or service.
Relating and supporting industries
the presence or absence of supplier industries and related industries that are internationally competitive.
Firm strategy, structure, and rivalry
the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry.