Classical Theories of International Trade

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What is one of the main points of the classical theories of international trade?

Increasing exports and trade

What was a key goal of mercantilism?

To amass more gold and wealth for their countries

In a world of free trade, what determines how much a country should trade?

International prices and costs of production

What shift occurred in economic theories in the mid-twentieth century?

From country-based to firm-based theories

What was a strategy used by nation-states to control more trade and amass more riches?

Expanding their colonies around the world

What was a goal of economic development according to the text?

To achieve economic growth through trade

What was a consequence of mercantilism?

Amassment of more gold and wealth for countries

What was a strategy used by mercantilism to encourage production?

All of the above

What is free trade characterized by?

Absence of government regulatory intervention

Who is considered to be the first economic theorist?

Richard Cantillon

What is the focus of laissez-faire economics?

Restricting government intervention in the economy

What is the result of specialization in production?

Focus on production of a limited number of goods

What did Physiocrats believe was the source of all wealth?

Agriculture

What did Giovanni Botero and Antonio Serra of Italy develop theories on?

The city as a unit of analysis

What is the goal of free trade?

To engage the maximum possible number of people and lead to further development

What did Adam Smith recommend?

Leaving economic decisions to the free play of self-regulating market forces

What is a result of international trade?

A transfer of knowledge and technology between nations

What is the definition of absolute advantage?

A producer can produce a good or service in greater quantity for the same cost or the same quantity at a lower marginal cost

Who is recognized as the father of economics?

Adam Smith

What is the definition of opportunity cost?

The cost of choosing one possibility over another

What is capitalism characterized by?

Most means of production are privately owned

Who developed the theory of comparative advantage?

Ricardo

What did the physiocrats believe?

The wealth of nations is derived solely from agriculture

What is a characteristic of a country with comparative advantage?

It can produce a good or service at a lower opportunity cost than other countries

What was the primary focus of the school of thought known as Mercantilism?

International trade and balance of trade

Who is attributed with the original concept of the price-specie-flow mechanism?

David Hume

What was the title of Philipp Wilhelm von Hornick's 1684 publication?

Austria Over All

What was the result of industrialization according to Giovanni Botero and Antonio Serra?

Development of national economies

What was the main characteristic of the capitalist economy according to the reproduction model?

Smooth reproduction of itself

Who was most closely associated with the idea of Mercantilism in England?

Sir Thomas Mun

What was the result of the 'Commercial Revolution'?

Transition from local economies to national economies

What was the primary means of adjusting price levels across borders according to the price-specie-flow mechanism?

Inflow or outflow of gold or specie

What is the main idea of the theory of absolute advantage?

Countries should produce and export goods where they have an absolute advantage

What is the relationship between the size of the market and the extent of specialization and division of labor?

A larger market leads to a greater degree of specialization and division of labor

What is the role of free trade in promoting international division of labor?

Free trade promotes international division of labor through specialization

What is the main idea of the vent for surplus doctrine?

A nation can exchange its overproduction for other goods in demand in other countries

What is the significance of a country's natural resources in the production of goods?

A country's natural resources are one of the factors that determine the production of goods

What is the outcome of international trade according to the theory of absolute advantage?

International trade brings about economic development

What is the relationship between the theory of absolute advantage and the theory of international trade?

The theory of absolute advantage and the theory of international trade are closely interwoven and interlinked

What is the role of specialization in the production of goods?

Specialization ensures effective competition across countries

Study Notes

Classical Theories of International Trade

  • Theories of international trade include mercantilism, which aims to encourage production within national territories through protectionist policies like tariffs, quotas, and monopolistic privileges.

Mercantilism

  • Mercantilist policies were used to increase gold and wealth for nation-states by increasing exports and trade.
  • The period also saw the rise of new nation-states that expanded their wealth by using their colonies around the world to control more trade and amass riches.

Trade and Economic Growth

  • Trade is an important stimulator of economic growth and helps countries achieve development.
  • In a world of free trade, international prices and costs of production determine how much a country should trade to maximize its national welfare.
  • Participation in a world of free unlimited trade is economically better than complete isolation to promote economic development.

Shifting Theories

  • In the mid-twentieth century, economists shifted from country-based to firm-based or company-based theories, known as modern theories.

Price-Specie-Flow Mechanism

  • The price-specie-flow mechanism, attributed to Scottish economist David Hume, illustrates how trade imbalances can self-correct and adjust under the gold standard.

Historical Contributors

  • Philipp Wilhelm von Hornick detailed a nine-point program for mercantilism in his book "Austria Over All, If She Only Will" in 1684.
  • Sir Thomas Mun was closely associated with the idea of mercantilism in England, where it was called the commercial system or mercantile system.
  • Giovanni Botero and Antonio Serra of Italy developed theories using the city as a unit of analysis and finding development to be the result of industrialization.
  • Richard Cantillon is considered by many to be the first economic theorist, emphasizing the need to import raw materials and export finished products to maintain a favorable balance of trade.
  • Physiocrats, a group of French economists, believed that agriculture was the source of all wealth and that agricultural products should be highly priced.

Laissez-Faire Economics

  • Laissez-faire economics is a theory that restricts government intervention in the economy, allowing for liberalization and a freely initiated trade.

Specialization and Comparative Advantage

  • Specialization is a method of production that allows an entity to focus on the production of a limited number of goods to gain a greater economic advantage.
  • Absolute advantage means that a producer can produce a good or service at a lower marginal cost than others.
  • Comparative advantage means that a producer can produce a good or service at a lower opportunity cost than others.
  • The theory of comparative advantage, attributed to Ricardo, states that a country has comparative advantage when it produces a good or service for a lower opportunity cost than other countries.

This quiz covers the key points of classical theories of international trade, including the role of trade in economic growth and equality, and the rise of new nation-states.

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