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Chapter 5

ADM 3318 - Chapter 5 Notes - International Trade Theory (1).docx

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ADM 3318International BusinessSeptember 28 2012Chapter 5 International Trade TheoryAn Overview of Trade TheoryFree Trade The absence of governmentimposed barriers such as quotas or duties that impede the free flow of goods and services between countriesAdam Smiths theory of absolute advantage argued that the invisible hand of the market mechanism rather than government policy should determine what a country imports and what it exportsThe Benefits of Trade Common sense notion of international trade dictates that countrys should export products they can produce at low cost and import products they cannot produceCountries should trade exports that are most efficiently produced in their economy even though a country can already produce it themselvesThe Pattern of International TradeClimate and natural resource endowments explain why certain countries are able to export certain commodity goods at different times of the yearProduct Life Cycle Proposed by Raymond Vernon the PLC theory can be used to explain export patterns for individual products New Trade Theory Proposed by Paul Krugmen the 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 endowmentsTheory of National Competitive Advantage Proposed by Michael Porter In addition to factor endowments Porter points out the importance of country factors such as domestic demand and domestic rivalry in explaining a nations dominance in the productionexport of an industryTrade Theory and Government Policy The arguments for unrestricted free trade is that both imports controls and export incentivessuch as subsidies are selfdeafening and result in wasted resourcesMercantilism The economic philosophy advocating that countries should simultaneously encourage exports and discourage importsBased on the foundation of receiving gold and silver for exports and giving away gold and silver for importsThe mercantilists saw no virtue in large volume trade rather they recommended policies to maximize exports and minimize importsZeroSum Game A situation in which a gain by one country results in a loss by another This is the flaw in MercantilismAbsolute Advantage When one county is more efficient than any other country in producing a particularly productAccording to Smith countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countriesA country should never produce goods at home that it can buy at a lower cost from other countriesProduction Possibility Frontier PFF The various output possibilities a country can produce from its resources pool
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