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Chapter 5

GMS 724 Chapter Notes - Chapter 5: Factors Of Production, Absolute Advantage, Eli Heckscher

Global Management Studies
Course Code
GMS 724

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Chapter 5 - Trade Pattern Theories
The free trade theories demonstrate how economic growth occurs through
specialization and trade; however, they do not deal with trade patterns such as
the amount, product composition, or partners a country will have if it follows a
free trade policy
How Much Does A Country Trade?
Free-trade theories of Specialization neither propose nor imply that only one
country should or will produce a given product or service
o Nontradable goods---products and services (such as haircuts and retail
grocery distribution) that are seldom practical to export because of high
transportation costs---are produced in every country
o However, among tradable goods, some countries import and export more
than others
Theory of Country Size
The theory of country size holds that large countries usually depend less on trade
than small ones
o Countries with large land areas are apt to have varied climates and an
assortment of natural resources, making them more self-sufficient than
smaller ones
o Most large countries (such as Brazil, China, India, Unites States and
Russia) import much less of their consumption needs and exports much
less of their production output than do small nations (such as Uruguay, the
Netherlands, and Iceland)
Distance to foreign markets affects large and small countries differently
o Normally, the further the distance, the higher the transport costs, the
larger the inventory carrying time, and the greater the uncertainty and
unreliability of timely product delivery
o The following example explains why distance is more pronounced for a
large country than for a small one
Assume that the normal maximum distance for transporting a given product is
100 miles because prices rise too much at greater distances
o Although almost any location in tiny Belgium is within 100 miles of a
foreign country, the same isn't true for its two largest neighbours, France
and Germany
o Thus, Belgium's dependence on trade as a percentage of its production
and consumption is greater than the comparable figures in either France
or Germany, a fact that can be partially explained by the distance factor
due to country size
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