12.

• Mercantilism


  Theory of international trade from the 15th to the 18th century, with the principal assertion that gold and silver were the mainstays of national wealth and essential to vigorous commerce
• Absolute Advantage

  A country has absolute advantage in the production of a good relative to another country if it can produce the good at lower cost and higher productivity
• Adam Smith's Theory of Absolute Advantage

  • Considers 2 countries and two commodities (2*2 model)
  • Trade is advantageous to both countries (each country had an absolute advantage in one of the goods)
• Comparative Advantage


  All countries entering into international trade will profit from such trade if they concentrate on the production of those products in which they are relatively most efficient
• Ricardo's Theory of Comparative Advantage


  • Main contribution was to show that there is a basic for beneficial trade whether or not countries have any absolute advantage
• Competitive Advantage


  • Includes the roles of labour skills, knowledge and innovation, financing, and government policy
  • Competitive Advantage is dynamic and changes over time
• Hecksher-Ohlin (H-O) Theory


  • Takes into account several countries and commodities, and several production factors
  • Multifactor approach to trade theory
  • Predicts the pattern of trade between countries based on the characteristics of the countries
  • A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good
• Comparative-Advantage Theory (CAT)


  Nations that are similar in their production-side capabilities (and in their general demand patterns) should trade little with each other
• Intra-Industry Trade


  Two way trade (exports and imports) of the same or very similar goods (goods in the same industry)
• Increasing Returns to Scale

  An increase in all inputs leads to a more than proportional increase in the level of output
• Free Trade


  A policy whereby the government does not intervene in trading between nations by tariffs, quotas, or other means
• Trade Barriers


  • Tariffs (taxes or duties levied on products as they cross national borders)
  • Non-tariff barriers (e.g. quotas, subsidies, licenses, burdensome regulatory proceedings)
• Indicators of Trade Performance

  • Exports
  • Imports
  • Trade balance (difference between export and import value)
  • Trade openness (ratio of total trade in goods and services over GDP)