BUS5 187 Lecture Notes - Lecture 9: Absolute Advantage, Win-Win Game, Comparative Advantage
Why Is Free Trade Beneficial?
•Free trade - a situation where a government does not attempt to influence
through quotas or duties what its citizens can buy from another country or
what they can produce and sell to another country
International trade allows a country
1. to specialize in the manufacture and export of products and services
that it can produce efficiently
2. to import products and services that can be produced more efficiently
in other countries
➢Limits on imports may be beneficial to producers, but not
beneficial for consumers
➢Trade theory shows why it is beneficial for a country to engage in
international trade even for products it is able to produce for itself
Outline of Theories
1. The mercantilist philosophy makes a crude case for government
involvement in promoting exports and limiting imports
2. Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade
3. New trade theory and Porter’s theory of national competitive advantage
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justify limited and selective government intervention to support the
development of certain export-oriented industries
1. What Is Mercantilism
2. Mercantilism (mid-16th century) suggests that it is in a country’s best
interest to maintain a trade surplus—to export more than it imports
◦Advocates government intervention to achieve a surplus in the balance of
trade
3. Mercantilism views trade as a zero-sum game—one in which a gain
by one country results in a loss by another
4. What Is Smith’s Theory
Of Absolute Advantage?
5. Adam Smith (1776) argued that a country has an absolute advantage
in the production of a product when it is more efficient than any other
country in producing it
◦Countries should specialize in the production of goods for which they have
an absolute advantage and then trade these goods for goods produced by other
countries
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
2. to specialize in the manufacture and export of products and services that it can produce efficiently to import products and services that can be produced more efficiently in other countries. Limits on imports may be beneficial to producers, but not beneficial for consumers. Trade theory shows why it is beneficial for a country to engage in international trade even for products it is able to produce for itself. The mercantilist philosophy makes a crude case for government involvement in promoting exports and limiting imports. Smith, ricardo, and heckscher-ohlin promote unrestricted free trade. New trade theory and porter"s theory of national competitive advantage justify limited and selective government intervention to support the development of certain export-oriented industries. Mercantilism (mid-16th century) suggests that it is in a country"s best interest to maintain a trade surplus to export more than it imports. Advocates government intervention to achieve a surplus in the balance of trade.
