International Trade Theories Overview

A country has absolute advantage in producing a good if it can produce it using fewer resources (e.g., labor) than another country.

A country has comparative advantage in producing a good if it can produce it at a lower opportunity cost than another country.

Economic theories explaining why nations trade, focusing on factors like labor costs and comparative advantages.

Classical trade theories are simplified and don't always account for complex real-world situations like different costs or non-specialization.

A simplified model used in classical trade theory, representing two countries, two products, and one factor of production.

An assumption in classical trade theories that the value of a good is determined by the amount of labor needed to produce it.

An assumption that the costs of producing goods remain constant as output expands.

Trade where all parties involved benefit from exchanges. International trade where all involved countries are better off.

Perfect labor mobility within a country, fixed and different technology among countries, fixed resources and tastes, and focus only on supply.

Trade arises from differences in relative productivity (comparative costs) between countries, not just absolute productivity.

Comparing the ratios of production costs (e.g., labor hours) for two goods in each country.

A country's export prices depend on the demand for its goods in the other country.

The rate at which a country trades its exports for imports.

A model that assumes an economy can produce goods with two limited inputs, like labor and capital. Each good uses more of one input than the other.

A good that uses a higher ratio of capital to labor in its production compared to another good.

A good that uses a higher ratio of labor to capital in its production compared to another good.

A theory stating that a country with abundant capital will export capital-intensive goods, and a country with abundant labor will export labor-intensive goods.

The observation that the US, despite being capital-abundant, exported labor-intensive goods and imported capital-intensive goods.

These theories state that continuous advancements in technology cause changes in the production possibilities frontier, leading to trade based on different technologies.

These theories identify three main types of technological advancements: improving production processes, enhancing product characteristics, and introducing new products.

A curve representing the maximum amount of two goods an economy can produce with its given resources.

A theory in international trade that explains how changes in a country's factor endowments affect its production possibilities and trade patterns.

When all factors of production (labor, capital, etc.) grow at the same rate. The Production Possibilities Frontier (PPF) shifts outwards symmetrically.

When one factor of production grows faster than others or only one factor grows. The PPF shifts outwards asymmetrically.

Economic growth focused on industries that produce goods for export. Leads to a disproportionate expansion of the PPF and potentially worsens a country's terms of trade.

Economic growth concentrated on industries that produce goods that a country imports. Tends to improve a country's terms of trade.

Explains international trade patterns based on differences in technological advancement among countries. Faster developing countries enjoy a temporary monopoly in the world market.

The difference in technological sophistication between countries, which allows the technologically advanced country a temporary monopoly in the world market.

Technological innovations create dynamic comparative advantages, leading to changes in trade patterns over time.

A permit required by a government for importing specific goods, usually for controlling trade.

A limit on the quantity of a good that can be imported or exported within a specific time period.

A complete ban on trade with a specific country or for a particular product.

An economy with high levels of trade liberalization, allowing for free trade with other countries.

An economy with significant restrictions on trade, limiting imports and exports.

An argument for protectionism, where a young domestic industry needs temporary protection from competition to grow.

Selling goods in a foreign market at a price below production cost, often to gain market share.

A process of merging national economies through reduced barriers to trade, payments, and factor movements.

International trade of goods within the same industry, like trading cars for cars between countries.

International trade of goods in different industries, like trading cars for apples between countries.

A situation where the cost per unit of producing a good decreases as the quantity produced increases. This can drive intra-industry trade.

Government measures intended to restrict or limit international trade flows. They focus on protection.

Government measures aimed at promoting international trade flows. They focus on increasing exports.

To protect domestic producers, consumers, balance of payments, and increase government revenue.

To promote production, employment, and exports.

Measures that governments use to regulate international trade, either to restrict or promote it.

Trade policy instruments based on economic principles, such as tariffs and quantitative restrictions.

Trade policy instruments used for political goals, such as boycotts, embargoes, or economic blockades.