Chapter 6 International Trade Theory
International Trade
Theories
Chapter – “4”
International Trade
“…free trade ultimately benefits all countries that participates in a free trade system. Those who take this position concede that some individuals lose as a result of a shift to free trade. But in the aggregate they argue that the gains outweigh the losses.”
(Charles W. L. Hill 2005, p. 144)
Trade Theories
1.
Mercantilism (Thomas Mun 1630)
Countries should Encourage Exports & Discourage Imports.
2.
Absolute Advantage (Adam Smith 1776)
Explains why unrestricted free trade is beneficial to a Country.
3.
Comparative Advantage (David Ricardo 1817)
Efficiency of production.
4.
Heckscher–Ohlin Theory (Eli Heckscher 1919 & Bertil Ohlin 1933)
The Leontief Paradox
(Wassily Leontief 1953)
Mercantilism
Initial trade theory that formed the foundation of economic thought from 1500 – 1800
Based on concept that a nations wealth is measured by its holding of treasure (gold)
Nations often imposed restrictions on imports since they did not want “their” treasure moving to another country to pay for the imports
David Hume pointed out an inconsistency in the mercantilist doctrine in 1752
The flaw was that it viewed trade as a zero sum game. Absolute Advantage
Absolute advantage holds that different countries produce some goods more efficiently than other countries
Thus, global efficiency can be increased through international free trade
Smith’s Basic Argument
•A country should never produce goods at home that it can buy at a lower cost from other countries.
•By specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade.
Basic Message of the theory of
Comparative Advantage
Potential
world production is greater with unrestricted trade than with restricted trade.
The
trade is a positive sum games in which all countries that participate realize economic gains. Ricardo’s Basic Argument
A
Theories
Chapter – “4”
International Trade
“…free trade ultimately benefits all countries that participates in a free trade system. Those who take this position concede that some individuals lose as a result of a shift to free trade. But in the aggregate they argue that the gains outweigh the losses.”
(Charles W. L. Hill 2005, p. 144)
Trade Theories
1.
Mercantilism (Thomas Mun 1630)
Countries should Encourage Exports & Discourage Imports.
2.
Absolute Advantage (Adam Smith 1776)
Explains why unrestricted free trade is beneficial to a Country.
3.
Comparative Advantage (David Ricardo 1817)
Efficiency of production.
4.
Heckscher–Ohlin Theory (Eli Heckscher 1919 & Bertil Ohlin 1933)
The Leontief Paradox
(Wassily Leontief 1953)
Mercantilism
Initial trade theory that formed the foundation of economic thought from 1500 – 1800
Based on concept that a nations wealth is measured by its holding of treasure (gold)
Nations often imposed restrictions on imports since they did not want “their” treasure moving to another country to pay for the imports
David Hume pointed out an inconsistency in the mercantilist doctrine in 1752
The flaw was that it viewed trade as a zero sum game. Absolute Advantage
Absolute advantage holds that different countries produce some goods more efficiently than other countries
Thus, global efficiency can be increased through international free trade
Smith’s Basic Argument
•A country should never produce goods at home that it can buy at a lower cost from other countries.
•By specializing in the production of goods in which each has an absolute advantage, both countries benefit by engaging in trade.
Basic Message of the theory of
Comparative Advantage
Potential
world production is greater with unrestricted trade than with restricted trade.
The
trade is a positive sum games in which all countries that participate realize economic gains. Ricardo’s Basic Argument
A