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