Economics Chapter 6: Trade Theory

Chapter 6: Trade Theory

• International trade involves goods and services, benefits, volume, and patterns.
• Mercantilism: Nations promote exports, restrict imports, and use government assistance, often through colonization, to achieve trade surpluses. Mercantilism worked by creating trade surpluses.
• Absolute Advantage: Countries specialize in producing goods they can produce more efficiently than others.
• Comparative Advantage: Nations benefit by specializing in areas where they have a lower opportunity cost. This allows for more efficient use of resources. Specialization and trade are key.
• Factor Proportions Theory: Production depends on the availability of factors of production like labor and capital, where countries specialize in products using abundantly available factors.
• International Product Life Cycle: Product's life cycle affects trade patterns; new products are initially produced in developed countries, then possibly transferred to developing countries.
• New Trade Theory: Economies of scale and network effects influence trade patterns.
• National Competitive Advantage: Factors like firm strategy, structure, and rivalry, demand conditions, related and supporting industries shape a country's competitive advantage.
• Benefits, Volume, and Patterns of International Trade are explored, along with theories of why nations trade.

Chapter 7: Political Economy of Trade

• Governments intervene in trade due to political, economic, and cultural considerations. Reasons for international trade intervention exist.
• Trade barriers include tariffs, quotas, and subsidies.
• Trade promotion involves measures like subsidies, tax reductions. Methods of trade restrictions are also explored.
• Global trade systems: GATT and WTO agreements work to reduce trade barriers among nations.
• Political, economic, and cultural motives for trade barriers are examined, along with the instruments countries use to restrict and promote trade.

Chapter 8: Foreign Direct Investment (FDI)

• FDI is purchasing physical assets or significant ownership in a foreign company to obtain management control. This is a significant strategic decision and influenced by many factors, including globalization, mergers and acquisitions, and entrepreneurship.
• FDI theories include the International Product Life Cycle, Market Imperfections, and Market Power.
• Management issues in FDI include control, acquisition/establishment decisions, and cost savings (purchase-or-build). Key drivers of FDI include globalization, M&A, and entrepreneurship.
• Governments can intervene in FDI to address balance of payments issues. Capital expenditure is involved.

Chapter 9: Regional Economic Integration

• Regional integration aims to promote free trade and investment among nations.
• Various levels of integration exist: Free Trade Area, Customs Union, Common Market, Economic Union, Political Union.
• Regional integration benefits include increased trade and higher standards of living.
• Potential drawbacks include job losses in certain sectors. Job loss is a controversial issue.
• Major integration examples include the European Union, USMCA, and ASEAN.
• The impact on jobs is a controversial issue in regional integration, with potential for job dislocations.
• Efforts to encourage free trade and investment are explored, including benefits and drawbacks.
• Integration in Europe, the Americas (USMCA), and Asia (ASEAN, APEC) are examined.
• Integration levels and debate, like the pros and cons, are also examined.
• The European Union includes the Euro.
• USMCA (formerly NAFTA) is a major integration example in the Americas.
• ASEAN and APEC are Asian regional examples.