Free Trade
* 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.
* The absence of barriers to the free flow of goods and services b
International Trade
Allows a country to specialize in manufacturing and importing/exporting of products and services that can be produced efficiently
Patterns of Trade
* Saudi Arabia exports oil
Ghana exports cocoa
* Switzerland exports chemicals, pharmaceuticals, watches, and jewelry
* Japan exports automobiles consumer electronics, and machine tools
New Trade Theory
The observed pattern of trade in the world economy may be due in part to the ability of firms in a given market to capture first-mover advantages.
Mercantilist Philosophy
Lots of government involvement in promoting exports and limiting imports.
Unrestricted Free Trade
No government
Promoted by Smith, Ricardo, and Heckscher - Ohlin
Limited and Selective Trade
New trade theory and Porter's theory of national competitive advantage justify limited and selective government intervention
International Trade Theories
1. Mercantilism
2. Absolute Advantage
3. Comparative Advantage
4. Heckscher-Ohlin Theory
5. Product Life Cycle Theory
6. New Trade Theory
7. Porter's Diamond
Mercantilism
An economic philosophy advocating that countries should simultaneously encourage exports (maintain a trade surplus) and discourage imports.
David Hume
Zero-Sum Game
A situation in which an economic gain by one country results in an economic loss by another.
Absolute Advantage
A country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it.
Adam Smith
Comparative Advantage
* Countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries.
* Trade is a positive sum game
Paul Samuelson
* The dynamic gains from trade may not always be beneficial
* Lower wages to trade
Heckscher-Ohlin Theory
* Cry baby theory
* Comparative advantages arises from differences in national factor endowments
Patterns of trade easy to see and are determined by factor endowments
Leontief Paradox
* Counter argument to Heckscher-Ohlin
* The US has no cheap labor and lots of capital
* Expected US to import clothing and export steel or gasoline
Constant Returns to Specialization
The units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier.
Product Life Cycle Theory
* As products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade
* Theory does not hold/fell apart
New Trade Thoery
* The ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade
* Gov. should come in and help out with money and protection
Porters Diamond
**They each play off each other
1. Factor endowments
2. Demand
3. Relating and Supporting Industries
4. Strategy Structure Rivalry
Factor Endowments
* A country's endowment with resources such as land, labor, and capital.
* A nation's position in factors of production necessary to complete in a given industry
* Input factors - basic and advanced factors
Economies of Scale
Cost advantages associated with large-scale production.
First-Mover Advantages
Advantages accruing to the first to enter a market.