BACC103

• mercantilism


  The principle assertion of mercantilism was that gold and silver were themainstays of national wealth and essential to vigorous commerce,emerged in England in the mid-sixteenth century. The main tenet of mercantilism was that it was in a country's best intereststo maintain a trade surplus, to export more than it imported. The flaw with mercantilism was that it viewed trade as a zero-sum game.(A zero sum game is one in which a gain by one country results in a loss byanother.)
• Absolute Advantage


   A country has an absolute advantage in the production of a productwhen it is more efficient than any other country in producing it. According to Smith, countries should specialize in the production of goodsfor which they have an absolute advantage and then trade these forgoods produced by other countries
• comparative advantage

  • 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 produce more efficiently itself.
• comparative advantage


  comparative advantage is thatpotential world production is greater with unrestricted free trade than it iswith restricted trade.
• Immobile Resources - Resources do not always move easily fromone economic activity to another. The process creates friction andhuman suffering too. While the theory predicts that the benefits offree trade outweigh the costs by a significant margin, this is of coldcomfort to those who bear the costs
• Diminishing Returns - The simple comparative advantage modeldeveloped above assumes constant returns to specialization. Byconstant returns to specialization we mean the units of resourcesrequired to produce a good (cocoa or rice) are assumed toremain constant no matter where one is on a country's productionpossibility frontier (PPF)
• Dynamic Effects and Economic Growth - The simple comparativeadvantage model assumed that trade does not change acountry's stock of resources or the efficiency with which it utilizesthose resources. This static assumption makes no allowances for thedynamic changes that might result from trade. If we relax thisassumption, it becomes apparent that opening an economy totrade is likely to generate dynamic gains of two sorts.
• Heckscher-Ohlin Theorythat comparative advantage arises from differences in national factorendowments. By factor endowments they meant the extent to which acountry is endowed with such resources as land, labor, and capital. different factor endowments explain differences in factor costs; specifically, the more abundant a factor, the lower its cost. The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce
• product life-cycle theory Raymond Vernon initially proposed the product life-cycle theory in themid-1960s. Vernon argued that the wealth and size of the U.S. market gave U.S. firms a strong incentive to develop new consumer products.
• product-life cycle


  Vernon went on to argue that early in the life cycle of a typical newproduct, while demand is starting to grow rapidly in the United States,demand in other advanced countries is limited to high-income groups.The limited initial demand in other advanced countries does not make itworthwhile for firms in those countries to start producing the new product, but it does necessitate some exports from the United States to thosecountries.
• New Trade Theory


  Ability of firms to attain economies of scale might have important implications for international trade
• Economies of scale

  Unit cost reductions associated with a large scale of output
• Sources of economies of scale

  • Ability to spread fixed costs over a large volume
  • Ability of large-volume producers to utilize specialized employees and equipment
• Effects of trade

  • Increase the variety of goods available to consumers
  • Decrease the average cost of those goods
• Industries with significant economies of scale


  • Global market may be able to support only a small number of enterprises