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Global Economics WGU

chapter 5 Theorys of International trade

QuestionAnswer
Classic Theories of international trade mercantilism, absolute advantage, comparative advantage
mercantilism the wealth of the world is fixed a nation that exports more than imports and captures a net inflow of wealth and becomes richer
According to mercantilism international trade is viewed as a zero sum game
absolute advantage to be efficient at the production of a good/service than others. A nation benefits by specializing in economic activities in which they possess an absolute advantage
comparative advantage gains from trade arise from differences in factor endowments or technological process
An agent has comparative advantage over another in producing something when he/she can produce a good at a lower relative opportunity cost
Modern theories of international trade product life cycle, strategic trade, and national competitive advantages of industries
product life cycle the 1st dynamic theory to account for changes in the patterns of trade over time
strategic trade strategic intervention by governments in certain industries can enhance their odds for international success
new product, maturing product, standardized product The product life cycle
national competitive advantages of industries represented by the Porter Diamond
The Porter Diamond firm strategy-structure-and rivalry, domestic demand conditions, related and supporting industries, country factor endowments
mercantilism main point governments should protect domestic industries and promote exports
mercantilism weakness inefficient allocation of resources- reduces wealth of nation in the long run
absolute advantages main points by specializing and trading each nation produces more and consumes more. The wealth of all trading nations and the world increases
absolute advantages weakness when one nation is absolutely inferior than another the theory is unable to provide any advice- when there are many nations it may be difficult to find an absolute advantage
comparative advantage main points even if one nation is absolutely inferior then other nations can still gainfully trade - factor endowments underpin com. adva.
comparative advantage weakness realistically static assuming that comparative advantage and factor endowments do not change over time
product life cycle main points production migrates to other advanced nations and then developing nations in different product life cycles
product life cycle weakness the US may not always lead in innovation - many new products are now launched simultaneously around the world
strategic trade main points strategic intervention by governments may help domestic firms reap 1st mover advantages
strategic trade weakness ideological resistance from many 'free trade' scholars and policy makers - invites all kinds of industries to claim they are strategic
national comparative advantage main points comparative advantage of different nations depends on the 4 interacting aspects of a diamond
The Porter Diamond 1 factor endowment
The Porter Diamond 2 domestic demand
The Porter Diamond 3 firm strategy structure and rivalry
The Porter Diamond 4 related and supporting industries
national competitive advantage of industries weakness has not been comprehensively tested, overseas and domestic demand may stimulate the competitiveness of certain industries
Created by: nashanta
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