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
free trade
Name the 8 trade theories.
1. mercantilism (neo-mercantilism)
2. absolute
advantage
3.Comparative advantage
4. Heckscher-ohlin
5.
The Product Life Cycle
5. THe leontief paradox
6. new trade
theory
7. Porter's Diamond
Encourage Exports• Discourage Imports• Viewed trade as ZERO SUMGAME
mercantilism
If a company exports 2 items, another country gains 2 items
2-2=0
zero sum game
Import Raw Materials -> CheapLabor -> Export Finished Goods• Exports have been greater than Imports
neo mercantilism (China)
argued that countries differ in their ability to produce goods efficiently
absolute advantage
Who came up with absolute advantage and when?
Adam Smith 1776
Adam Smith said trade is a ________________ sum game
positive-sum game
Countries should specialize in producing goods they have _______________ advantage in and trade these for goods produced by other countries who are advantaged in other areas
Absolute advantage; absolute advantage by Adam Smith
all countries that participate realize economic gains.
positive sum game
agreed that countries differ in their ability to produce goods efficiently
comparative advantage
Who developed the theory of comparative advantage and when?
David Ricardo; 1817
It is more important to focus on __________________ advantage and import even where it has ________________________ advantage
comparative; absolute
when a country is more efficient at producing a good comparatively to another country
comparative advantage
Nations will trade based on ______________ cost and ______________ ______________
oppurtunity; limited resources
comparative advantage by David Ricardo says that trade is a ___________ sum game
positive
believed that Comparative Advantage arose from differences in National factor endowments(land, labor, capital)
Heckscher Ohlin Theory
__________________would predict that since the USA has strong FactorEndowments for capital, therefore should be a strong exporter of ____________intensive goods (printing presses, oil rigs) and an importer of ___________intensive goods•
Heckscher Ohlin; capital; labor
Countries like Germany are stronger exporters of capital-intensive good, making the theory of the US a paradox. Why?
The USA chose to spend its limited resources elsewhere; skilled production, technology, innovation, entrepreneurship
proposed that that mostnew products were developed by the US andwent through a life-cycle that brought themback as imports
Product Life Cycle theoory by Raymond Vernon in the 1960s
5 stages of product life cycle
1. US production and demand
2. US production and US and foreign
demand
3. US and foreign production and demand
4. US-foreign
and foreign production and US and foreign demand
5. foreign
production only and US and foreign demand
The Product Life-CycleTheory Problems
1. Major MNES
2. Ethnocentric
3. most products now are
introduced simultaneously across the globe
Economies of scale and first mover advantage are part of the _______ theory?
new trade theory by Paul Krugman 1970
increasing product variety and pressures to reduce costs favors large companies
economies of scale
global market can only support a limited number of firms producing the same products or services
first mover advantage
Paul Krugman _________ with Hecksher ohlin and __________ with Ricardo's competitive advantage
disagrees; agrees
What is the current trade theory?
Porter's Diamond by Michael Porter in 1990s
Michael Porter proposed 4 broad attributes?
1. factor endowments
2. demand conditions
3. relating and
supporting industries
4. firm strategy, structure and rivalry
presence of suppliers assists growth andprovides new technology
relating and supporting industries
competitive advantage unique to firm`
firm strategy
Two additional determinants to Porters diamond?
Chance/luck and government
advanced factors of Porter's diamond
communication, infrastructure, skilled labor, technology
More ________________ needs to begathered to provide a conclusionon Porter's Diamond
empirical data
Which countries has the largest share of exports?
1. China
2. EU
3. United States
The US is the top importer of _________ and top exporter of ____________
cars; petroleum
WHo are the world's biggest importers?
1. US
2. China
3. Germany
Biggest exporters?
1. China
2. US
3. Germany
What is the major flaw of theories of global trade? Why?
there is NO FREE TRADE; because of gov't intervention
Why does the gov't impose tarrifs?
1. increase gov't revenues
2. Provide protection to domestic
producers and labor force from external competition
Political Arguments for Government Interventio
1. retaliation
2. national security
3. protecting
consumers, human rights, and jobs
4. furthering foreign policy objectives
Economic Arguments for Intervention
1. infant industry argument
2. strategic trade policy
Protect Industries that are in First-Moverposition• Help Domestic Firms overcome Barriers ofEntry
strategic trade policy
The Revised Case for FREE TRADE by Paul Krugman states that strategic trade policy is a __________ policy and creates?
beggar-thy-neighbor; retaliation and war
what are 6 instruments of trade policy
1. tariffs
2. subsidies
3. import quptas
4. local
content requirements
5. admin policies
6. anti-dumping duties
Who benefits from import restraints?
domestic producers by limiting import competition, but this raises prices of imported goods for consumers
a tax levied as a fixed charge for each unit of a good imported`
specific tariff
a tax levied as a proportion of the value ofthe imported good`
ad valorem tariff
Why is sugar more expensive in the US than the rest of the world?
tariffs
a government payment to a domestic producer
subsidy
Subsidies help domestic producers compete against?
low-cost foreign imports and gain export markets