International Business Chapter 6 – International Trade Theory.docx
Dr Lakmal Abeysekera
International Business Chapter 6 – International Trade Theory
- Free trade: no government intervention in terms of quotas or duties. There is
the invisible hand of the market mechanism, should determine a country’s
imports and exports. => output increases, both countries are beneficial.
- Benefits of trade: common sense suggests that some trade are beneficial
a) why trade when a country can actually better producing a product by
itself? A country’s gain if citizens by products from other nations that
could be produced at home.
b) Allow a country to specialize in the manufacture and products’ exports.
c) However, sometimes difficult for a country’s population to accept.
Moreover, a whole country is hurt by such action; limits on imports
- Pattern of international trade: climate and natural resource, proportions of
factors of production available in each country.
- New trade theory suggests that some countries specialize in the product and
export of particular products because in certain industries the world market
can support only a limited numbers of firms.
Trade theory and government policy
- emerged in England in the mid-sixteen century.
- Principle assertion: gold and silver – considered as currency of trade
- In a country’s best interests to maintain a trade surplus, to export more than
- Advocated government intervention to achieve a surplus in the balance of
- Considered as a zero-sum game: which a gain by one country results in a loss
in another country.
- it is when a country is more efficient producing a good compare to another
country producing it.
- By engaging in trade and swapping products, producers in both countries
could consume more of both products.
- Can see trade as a positive-sum game, produces net gains for all involved.
- makes sense for a country to specialize in the production of the goods than it
produces most efficiently and to buy the goods that it produces less
efficiently from other countries.
- Potential world production is greater with unrestricted free trade than it is
with restricted trade. Extensions of the Ricardian model
Immobile resources – resources do not always shift quite so easily from producing
one good to another. The process creates friction and human suffering. Political
opposition to the adoption of a free trade regime typically comes from those whose
jobs are most at risk.
Diminishing returns – constant returns to specialization mean the units of
resources required to produce a good are assumed to remain constant no matter
where one is on a country’s production possibility frontier (PPF). Firstly, no all