Wk 1 Individual Assignment Major Trade Theories

Topics: Economics, International trade, Comparative advantage Pages: 4 (990 words) Published: October 15, 2012
Major Trade Theories Paper

University of Phoenix

Global Business 381

Debra Patterson

December 20, 2010

Professor Bobbie Murray

Absolute Advantage:
General Theory:

Absolute advantage theory addresses when a country has multiple products. “According to theory of absolute advantage, a country has an absolute advantage over the others if it is able to produce more of a product or service with the same number of resources or the same number of a good or service with fewer resources” (Salvatore, 2005, p. 30). This occurs because of the existence of better resources for producing a particular product or service. The concept of absolute advantage can also be applied to other economic entities, such as regions, cities, or firms, but we will focus attention on countries, specifically in relation to their production decisions and international trade flows.

Comparative advantage theory addresses when a country has abundance in trade. “According to theory of comparative advantage, a country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than the others” (Salvatore, 2005, p. 33). In other words, the benefits of a country that is low-producing a good or service would benefit as a country to specialize in producing that good or service and compare with the production of other goods or services.

Hechscher-Ohlin Factor Endowment

General Theory:

The Hechscher-Ohlin factor endowment theory explains the composition of international trade in terms of the relative factor endowments of different countries. “The Heckscher–Ohlin (H–O) theory can be expressed in the form of two theorems: first theory, H–O theorem deals with and predicts the pattern of trade and the second part is the factor–price equalization theorem deals with the effect of international trade on factor prices” (Salvatore, 2005, p. 82)....

References: Figge, F., Hahn, T. (2005), "The cost of sustainability capital and the creation of sustainable
value by companies", Journal of Industrial Ecology, Vol. 9 No.4, pp.47-58.
Heckscher-Ohlin Approach to International Trade. (2002). In An Encyclopedia of Macroeconomics.
Retrieved December 20, 2010 from
Ronald Findlay (1987). "Comparative Advantage," The New Palgrave: A Dictionary of
Economics, v. 1, pp. 514-17.
Salvatore, Dominick. (2005). Introduction to International Economics, 1e.
Hardwick, Khan and Langmead (1990). An Introduction to Modern Economics - 3rd Edn.
A. O 'Sullivan & S.M. Sheffrin (2003). Economics. Principles & Tools.
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