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MGC2120 (19)
Chapter 6

International Business Chapter 6 – International Trade Theory.docx

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Monash University
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 Mercantilism - 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 it imported. - Advocated government intervention to achieve a surplus in the balance of trade. - Considered as a zero-sum game: which a gain by one country results in a loss in another country. Absolute Advantage - 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. Comparative Advantage - 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 resources are
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