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Chapter 6 International Trade and InvestmentTrade is the voluntary exchange of goods services assets or money between one person or organization and anotherbecause it is voluntary both parties to to transactions must believe they will benet from the exchangeInternational Trade is trade between residents of two countriesresidents may be individuals rms or non prot organizationsCLASSICAL COUNTRYBASED TRADE THEORIESthese countrybased theories are particularly useful for describing trade in commodities standardized undifferentiated goodsmultinational corporations MNCs rose to power in the middle of the twentieth centuryscholars shifted their attention to the rms role in promoting international tradedeveloped after World War II these theories are useful in describing patterns of trade s in differential good for which brand name is an important component of customerpurchase decisionMercantilism is the sixteenthcentury economic philosophyMercantilismcountrys wealth is measured by its holdings of gold and silvers goal should be to enlarge these holdings by promoting exports and countrydiscouraging importsexportoriented manufactured favored mercantilist trade policies such as those establishing subsidies or tax rebates which stimulated sales to foreignersdomestic manufactures endorsed mercantilist trade policies like imposing tariffs and quotasgovernmental subsidies of the exports of industries are paid by taxpayers in the form of higher taxesgovernmental import reactions are paid for by consumers in the form of higher prices because domestic rms face less competition from foreign producersmodern supporters of such theory are called neomercantilist or protectionist Absolute advantage Adam Smith father of freemarket economicsmercantilist basic problem is that it confuses the acquisition of treasure with acquisition of wealth demonstrated that mercantilism actually weakens a country because it robs individuals of the ability to trade freely and to benet from voluntary exchanges a country must squander its resources producing goods it is not suited to produceinefciencies caused by mercantilismadvocated free trade among countries as a means of enlarging a countrys wealthenables a country to expand the amount of goods and service available Theory of absolute advantage suggest that a country should export those goods and services for which it is more productive than other countries are import those goods and services for which other countries are more productive than it is
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