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Midterm Study Notes - Chapter 5-International Trade Theory

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University of Toronto Mississauga

MGT491 Midterm Notes Ch. 5: International Trade Theory N In international trade, there are always winners and losers, but economists argue that the benefits to the winners outweigh the costs borne by the losers, so there is still a net gain to society. N In the long run, free trade stimulates economic growth and raises living standards N International trade theory was the driver behind the formation of the WTO and regional trade blocs like the EU and NAFTA AN OVERVIEW OF TRADE THEORY N Mercantilism advocated that countries should simultaneously encourage exports and discourage imports o Old and largely discredited, but still remains in modern political debate and in trade policies of many countries N ,2$2L9K89K04741,-84O:90,;,39,J0 first to explain why unrestricted free trade is beneficial to a country N Free trade situation where 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 o Argued that the invisible hand of the market mechanism, rather than government policy, should determine what a country imports and exports o Imply that a laissez-faire attitude toward trade is in the best interests of a country N Building on the theory of Smith, theory of comparative advantage by David Ricardo intellectual basis for the modern argument for unrestricted free trade N #L.,748Z47NZ,8701L30L39K0 century by the Heckscher-Ohlin theory The Benefits of Trade N Theories of Smith, Ricardo and Heckscher-Ohlin identify with precision the specific benefits of international trade N It is beneficial for a country to engage in international trade, even for products it is able to produce for itself allows countries to specialize in the manufacture and export of products that can be produced more efficiently in that country, while importing products that can be produced more efficiently in other counties N Import controls may benefit particular groups (such as domestic textile businesses and their employees) by keeping their jobs, these theories suggest that this action hurts the economy as a whole. Limits on imports are often in the interests of domestic producers but not domestic consumers The Pattern of International Trade N Climate and natural resource endowments explain why certain countries produceexport the things they do N #L.,7489K04741.425,7,9L;0,;,39,J0411078,30[5O,3,9L43L39072841L39073,9L43,OL110703.08L3O,-4:7 productivity; H-O theory emphasizes the interplay between the proportions in which the factors of production (land, labour, and capital) are available in different countries and the proportions in which they are needed for producing particular goods. rests on the assumption that countries have varying endowments of the various factors of production. N Product life cycle theory suggests that early in their life cycle, most new products are produced in and exported from the country in which they were developed. As it becomes more widely accepted internationally, production starts in other countries. Product may ultimately be exported back to the country of its original innovation. N New trade theory stresses that in some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments but because in certain industries the world market can only support a certain number of firms o Ex. aircraft industry N !4790789K047413,9L43,O.42509L9L;0,;,39,J0 attempts to explain why particular nations achieve international success in particular industries in addition to factor endowments, he points out the importance of ,.4:39781,.94788:.K,842089L.02,3,342089L.7L;,O7940[5O,L3,3,9L43842L3,3.0L39K0 production and export of particular products. Trade Theory and Government Policy N All these theories agree that international trade is beneficial to a country ut lack agreement in their recommendations for government policy N Mercantilism government involvement in promoting exports and limiting imports N SmithRicardoH-O theories unrestricted free trade, argument is that both import controls and export incentives are self-defeating and result in wasted resources
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