International Trade Theory
CHAPTER 5: INTERNATIONAL TRADE THEORY
QUICKNOTES IN GLOBAL INTERNATIONAL TRADE
Condensed by: Group 2
7 THEORIES OF INTERNATIONAL TRADE: 1. Mercantilism
2. Absolute Advantage
3. Comparative Advantage
4. Heckscher-Ohlin Theory
5. Product Life-Cycle Theory
6. New Trade Theory
7. The Theory of National Competitive Advantage 1. Mercantilism
-emerged in England in the mid-16th century. The main tenet of mercantilism was that it was in a country’s best interests more than it imported. Consistent with this belief, the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade. To achieve this, imports were limited by tariffs and quotas, while exports were subsidized. The flaw with mercantilism was that it viewed trade as a zero-sum game. Zero-sum Game- is one in which a gain by one country results in a loss by another. 2. Absolute Advantage
-In his 1776 landmark book The Wealth of Nations, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game. He argued that countries differ in their ability to produce goods efficiently. According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries. He added that a country should never produce goods at home that it can buy at a lower cost from other countries. Smith demonstrates that, by specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade. 3. Comparative Advantage
-In his 1817 book Principles of Political Economy, David Ricardo of Comparative Advantage Theory said that 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 means buying goods from other countries that it could
QUICKNOTES IN GLOBAL INTERNATIONAL TRADE
Condensed by: Group 2
7 THEORIES OF INTERNATIONAL TRADE: 1. Mercantilism
2. Absolute Advantage
3. Comparative Advantage
4. Heckscher-Ohlin Theory
5. Product Life-Cycle Theory
6. New Trade Theory
7. The Theory of National Competitive Advantage 1. Mercantilism
-emerged in England in the mid-16th century. The main tenet of mercantilism was that it was in a country’s best interests more than it imported. Consistent with this belief, the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade. To achieve this, imports were limited by tariffs and quotas, while exports were subsidized. The flaw with mercantilism was that it viewed trade as a zero-sum game. Zero-sum Game- is one in which a gain by one country results in a loss by another. 2. Absolute Advantage
-In his 1776 landmark book The Wealth of Nations, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game. He argued that countries differ in their ability to produce goods efficiently. According to Smith, countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries. He added that a country should never produce goods at home that it can buy at a lower cost from other countries. Smith demonstrates that, by specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade. 3. Comparative Advantage
-In his 1817 book Principles of Political Economy, David Ricardo of Comparative Advantage Theory said that 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 means buying goods from other countries that it could