The World of International Trade

International Trade Theories

• New trade theory focuses on the concept of economies of scale and how it affects international trade.
• The mercantilist trade theory advocates for government involvement in promoting exports and limiting imports.

Comparative Advantage

• According to the theory of comparative advantage, a country should specialize in producing goods for which it has a lower opportunity cost.
• The theory suggests that trade is beneficial because it allows countries to specialize in what they do best and import what they do not produce efficiently.

Ricardian Model

• The assumptions of the Ricardian Model include a single factor of production, labor, and constant returns to scale.

Dynamic Gains

• Two types of dynamic gains that can result from free trade are increased economic efficiency and innovation.

Samuelson Critique

• The Samuelson critique raises concerns about the limitations of the Ricardian Model in explaining real-world trade patterns.

Benefits of Free Trade

• Countries that adopt a more open stance toward international trade enjoy increased economic growth and higher living standards.

Heckscher-Ohlin Theory

• The Heckscher-Ohlin theory explains comparative advantage arising from differences in national factor endowments.

New Trade Theory

• One of the implications of economies of scale for international trade is that large firms can export to other countries, leading to increased trade.
• The new trade theory suggests that countries can increase the variety of goods available to consumers by exporting and importing.

Porter's Diamond

• The four broad attributes of a nation that shape the environment in which local firms compete, according to Porter's diamond, are factor conditions, demand conditions, firm strategy, and supporting industries.
• One of the factors that can influence the national diamond is government policy.
• One of the advantages of being a first-mover in a market is the ability to capture market share and establish a competitive advantage.

International Success

• One of the factors that can help a nation achieve international success in a particular industry is the presence of related and supporting industries.

Domestic Demand

• One of the factors that can shape the domestic demand of a country is the presence of local consumers who are willing and able to purchase goods.

Firm Rivalry

• One of the factors that can influence firm rivalry in a country is the presence of local competitors who can challenge company market share.

Managerial Implications

• One of the managerial implications of Porter's theory is that companies must be aware of their position within the national diamond and adjust their strategy accordingly.

Gains from Trade

• The main concept behind gains from trade is that countries can increase their economic efficiency by specializing in what they do best and trading with other countries.

Free Trade vs Managed Trade

• The main difference between free trade and managed trade is the level of government intervention in the economy.

International Trade

• The theory of comparative advantage explains why international trade is beneficial even for products a country can produce itself.
• The main focus of Ricardo's theory of comparative advantage is the concept of opportunity cost.
• The main focus of the Heckscher-Ohlin theory is the concept of national factor endowments.
• The main focus of Vernon's product life-cycle theory is the concept of product life cycles and how they affect international trade.
• Limits on imports are often in the interest of domestic producers but not domestic consumers because they can limit competition and increase prices.
• Free trade allows for the unrestricted production and sale of goods across countries.
• The main benefit of free trade is increased economic efficiency and higher living standards.
• Much of the observed pattern of international trade is difficult to explain because it often involves complex interactions between multiple factors and variables.