Classical Trade Theories Flashcards

Mercantilism

• A government system aimed at restricting international trade to strengthen national power.

Additional Assumptions

• Resources are immobile across countries, hindering labor and capital transfer.
• Absence of trade barriers promotes free exchange between nations.
• There's a necessity for exports to balance imports, ensuring trade equilibrium.
• Labor is identified as the sole significant resource in trade models.

Labor Theory of Value

• The price of goods before trade is directly tied to the labor input required for their production.

Constant Returns to Scale

• A fixed ratio exists between labor input and output level, maintaining consistent productivity proportions.

Absolute Advantage

• Describes the capacity of a country to produce goods with fewer inputs than any competitor globally.

Adam Smith's Principle

• Suggests countries should focus on goods where they possess an absolute advantage, enhancing efficiency.

Market Forces and Free Trade

• Combined economic factors drive countries to adhere to their absolute advantages, optimizing productivity.

Labor Cost Calculation

• Labor cost is computed using wage rates multiplied by the number of hours worked.

David Ricardo's Law of Comparative Advantage

• Highlights specialization in areas of greatest efficiency or least disadvantage to maximize trade benefits.

Slope of the PPF

• Represents the pre-trade relative prices and trade-offs between different goods.

Terms of Trade

• Defines the relative price points at which international trade occurs.

Production and Consumer Gains

• Trade focuses production on sectors where labor is more efficient.
• Consumers enjoy lower prices for goods as a result of competitive international markets.

Wage Disparities and Productivity

• Trade between countries with varying productivity levels is contingent on differing wage structures.

Loss of Comparative Advantage

• A country can forfeit its comparative benefits if wage growth exceeds productivity improvements.

Limitations of the Model

• Fails to account for the origins of productivity differences between nations.
• Predicts extreme scenarios of total specialization in exports, which is often unrealistic.

Trade Between Similar Economies

• Suggests greater trade gains exist between countries with differing production technologies, despite most trades occurring among similarly developed nations.

Motives for Trade

• Provides rationale for trade relationships between developed and developing countries, emphasizing mutual benefits.

High-Wage Countries and Trade

• High-wage countries can still gain from trade despite competition from lower-wage nations.

Explore key concepts and terms related to the Classical Theory of International Trade with these flashcards. Definitions cover important theories such as mercantilism and various trade assumptions. Perfect for students looking to deepen their understanding of international economics.