IBT CHAPTER 1 AND 2.pdf

EVOLUTION OF INTERNATIONAL TRADE THEORY: A GLIMPSE 8. In a free trade system, individuals benefit from a greater choice of LESSON SUMMARY affordable goods, while merca...

EVOLUTION OF INTERNATIONAL TRADE THEORY: A GLIMPSE 8. In a free trade system, individuals benefit from a greater choice of LESSON SUMMARY affordable goods, while mercantilism restricts imports and reduces the choices available to consumers. 1. The main historical theories are called classical and are from the perspective of a country, or country-based. By the mid-twentieth 9. Absolute advantage is the country's inherent ability to produce century, the theories began to shift to explain trade from a firm-, rather specific goods efficiently and effectively at a relatively lower marginal than a country-based, perspective; hence, referred to as modern and are cost, lesser workforce, lesser time, and lesser cost without firm-based or company-based. compromising the quality. 2. The evolution of what is recognized as the Standard Theory of 10. Comparative advantage refers to the country's capability to International Trade goes back to the years when Adam Smith's Wealth produce the specific good at lower marginal cost and opportunity cost of Nations (1776) and David Ricardo's Principles of Economics (1951) compared to other countries. were published. The theory is a classical, country-based international trade theory that states that a country's wealth is determined by its 11. Marginal cost is the cost incurred in producing an additional unit of holdings of gold and silver. a product. Opportunity cost means the value you will get from an alternative that you did not choose. 3. Smith and Ricardo herald the formulation of a theory of free trade. Free trade, as opposed to the mercantilist policies of protection, was 12. The Standard Theory of International Trade has evolved into the championed by both Smith and Ricardo as a route to achieve Theory of International Trade and Commercial Policy, still considered production efficiency at a global level. to be one of the oldest branches of economic thought. From the ancient Greeks to the present, government officials, intellectuals, and 4. The possible dilemmas in terms of the need for monetary economists have deliberated about the determinants of international adjustments for countries having a continuous trade surplus could be trade, have discussed whether trade is beneficial or harmful to nations, shelved aside by relying on the automatic adjustment as posited by and, more importantly, have tried to determine what trade policy is Smith's contemporary, David Hume (1776), when he offered the theory best for any particular country of the price-specie flow mechanism. 5. Division of labor is the separation of a work process into a number of tasks, with each task performed by a separate person or group of persons to boost productivity and efficiency and enhance specialization. 6. Trade surplus is the amount by which the value of a country's exports exceeds the cost of its imports. 7. Industrial capitalism was the second phase of capitalism in which industries/ factories became the dominant factor in the production of goods. KEY TAKEAWAYS 11. Marginal cost is the cost incurred in producing an additional unit of a product. 1. The classical theories of international trade are the historical country-based theories. 12. Opportunity cost means the value you will get from an alternative that you did not choose. 2. The modern mid-twentieth century theories are referred to as firm- based or company-based. 13. The Theory of International Trade and Commercial Policy, still considered to be one of the oldest branches of economic thought, has 3. Adam Smith published Wealth of Nations (1776) and David Ricardo evolved from the Standard Theory of International Trade. published Principles of Economics (1951). 4: The Standard Theory of International Trade is a classical, country- based international trade theory that states that a country's wealth is determined by its holdings of gold and silver. 5. In a free trade system, individuals benefit from a greater choice of affordable goods, while mercantilism restricts imports and reduces the choices available to consumers. 6. Division of labor is the separation of a work process into a number of tasks, with each task performed by a separate person or group of persons. 7. Trade surplus is the amount by which the value of a country's exports exceeds the cost of its imports. 8. Industrial capitalism was the second phase of capitalism in which industries/ factories became the dominant factor in the production of goods. 9. Absolute advantage is the country's inherent ability to produce specific goods efficiently and effectively at a relatively lower marginal cost. 10. Comparative advantage refers to the country's capability to produce specific goods at lower marginal cost and opportunity cost.  BARTER KEY TAKEAWAYS ORIGIN OF MONEY 1. Bartering involves a direct trade/exchange of goods and services. LESSON SUMMARY 2. The advantage of bartering is that it does not involve money and it is 1. It is believed that the first recognizable metal coins appeared in very simple. China, during 1000 BC. The earliest currency of China of the eighth century BC consisted of miniature hoes and billhooks (pruning 3. However, it is difficult to find people who need what the other implements), with inscriptions indicating the authority. people have and there is no standard measure of value. 2. Sometime around 770 BC, miniature replicas of tools and weapons 4. Even today, there are swap markets, online auctions, and numerous cast in bronze were used by the Chinese as a medium of exchange. The websites that offer online bartering arrangements. small bronze celts (prehistoric tools resembling chisels) and bronze rings played a monetary role. Due to impracticality, these tiny daggers, 5. The early humans had very little needs and there was no need for spades, and hoes were eventually abandoned for objects in the shape of exchange of goods. a circle. These objects became some of the first coins. 6. As the number of people increased, they started forming groups and 3. Around 700 BC, the Chinese moved from coins to paper money. By travelled long distances to find food. the time Marco Polo (the Venetian merchant, explorer, and writer) visited China in approximately AD 1271, the emperor of China had a 7. Gradually, however, intergroup interaction started and this paved the good handle on both the money supply and various denominations. way for a system of trading. 4. The first region of the world to use an industrial facility to 8. As cultivation and farming flourished, there was no shortage of manufacture coins (a mint) was in Europe, in the region called Lydia food. They started trading surplus goods and the system of trade (now western Turkey). flourished. Minting is the process of making a coin by stamping metal. In 600 BC, 9. The history of bartering can be traced back to 6000 BC, when the around the time China started using paper money. Lydia's King barter system was introduced by the tribes of Mesopotamia, then Alyattes minted the first official currency, non-standardized coins from adopted by the Phoenicians, and improved by the Babylonians. electrum (a naturally occurring alloy of gold and silver) that did not have a standardized value. 10. Salt was so valuable at that time that the salary of Roman soldiers was paid in salt. 5. King Croesus (son of King Alyattes) of Lydia (reigned 560-546 BC) produced a bimetallic system of pure gold and pure silver coins. The Croeseid, anciently Kroiseioi stateres, was a type of coin, either in gold or silver, which was minted in Sardis by King Croesus, from around 550 BC. Croesus is credited with issuing the first true gold coins with a standardized purity for general circulation, and the world's first bimetallic monetary system.  HISTORY OF PHILIPPINE CURRENCY 6. The foundation deposit of the Artemisium (temple to Artemis) at Ephesus shows that electrum (which the Greeks called "white gold") Lesson Summary coins were in production even before Croesus, possibly under King 8. The US Congress approved the Coinage Act for the Philippines in Gyges. 1903 The Uins issued under the system bore the designs of Filipino engraver and The colinelecio Figueroa. Coins in denomination of one- 7. The European colonial governments in North America issued the half centavo to one artisd were minted. The renaming of El Banco first paper currency in Canada (then a French colony). Instead of going Español Filipino to Bank of the Philippine Islands in 1912 paved the back to a barter system, the colonial governments issued IOUs way for the use of English from Spanish in all notes and coins issued (promissory notes) that traded as a currency. up to 1933. Beginning May 1918, treasury certificates replaced the silver certificates series, and a one-peso note was added. 8. According to Adam Shortt, the great Canadian economic historian, the first regular system of exchange in Canada involving Europeans 9. Two kinds of notes circulated in the country during the outbreak of occurred in Tadaoussac in the early seventeenth century, where French World War II. The Japanese Occupation Forces issued war notes in traders bartered each year with the Mantagnais people (also known as high denominations, which had no back up reserves; thus, Filipinos the Innu) trading weapons, cloth, food, silver items, and tobacco for dubbed it "Mickey Mouse" money. Guerrilla notes or resistance animal pelts, especially those of the beaver. currencies, in low denominations that were issued by different provinces and municipalities, show resistance against the Japanese 9. The first colonial settlement at Quebec on the St. Lawrence River occupation. was established by Samuel de Champlain in 1608. The beaver pelt was the one universally accepted medium of exchange in the infant colony, 10. Having gained independence from the United States following the although wheat and moose skins were also employed as legal tender. end of World War II, the country used as currency old treasury As the colony expanded and its economic and financial needs became certificates overprinted with the word "Victory." more complex, coins from France came to be widely used. 11. With the establishment of the Central Bank of the Philippines in 10. Silver and copper coins designed especially for the colonies was 1949, the first currencies issued were the English series notes printed minted in 1670. These coins could not be circulated in France. While by the Thomas de la Rue & Co., Ltd. in England and the coins minted apparently intended only for the West Indies, a small number of these at the US Bureau of Mint. coins are believed to have circulated in Canada. 12. The "Filipinization" of the republic coins and notes began in the 11. The West Indies are a chain of islands in the Caribbean Sea and late 60s and is carried through to the present. In the 70s, the Ang Atlantic Ocean divided into three groups: The Bahamas, the Greater Bagong Lipunan (ABL) series notes printed at the Security Printing Antilles, and the Lesser Antilles. Plant were circulated starting 1978. In 1983, the Flora and Fauna coin series was initially issued. The New Design Series of banknotes issued 12. During the mid-1600s, Spanish dollars (piastres) began to circulate in 1985 replaced the ABL series. Ten years later, a new set of coins and in the French colonies These over-stamped Spanish dollars represent notes were issued carrying the logo of the new Bangko Sentral ng the first distinctive Canadian coins Pilipinas. KEY TAKEAWAYS 10. One-peso and five-peso revolutionary notes were printed as Republika Filipina Papel Moneda de Un Peso and Cinco Pesos. 1. Barter was the means of trade long before the Spaniards came to the Philippines. 11. With the coming of the Americans in 1898, the Philippines became one of the most prosperous countries in East Asia. The Americans 2. Barter was inconvenient so cowries, glossy, often colorfully instituted the gold standard and pegged the Philippine peso to the patterned shells, was adopted as a medium of exchange. American dollar at the ratio of 2:1. 3. Barter rings, made in gold called piloncitos, were the first local form 12. The gold standard is a monetary system where a country's paper of coinage. These had a flat base that bore an embossed inscription of money has a value directly linked to gold; countries agreed to convert the letters "MA" or "M" believed to be the name by which the paper money into a fixed amount of gold per unit of currency. Philippines was known to Chinese traders. 13. The US Congress approved the Coinage Act for the Philippines in 4. The cobs or macuquinas (silver coins) were the earliest coins 1903. The coins issued under the system bore the designs of Filipino brought in by the galleons from Mexico and other Spanish colonies. engraver and artist, Melecio Figueroa. Coins in denomination of one- These silver coins usually bore a cross on one side and the Spanish half centavo to one peso were minted. royal coat-of-arms on the other. 14. El Banco Español Filipino was renamed Bank of the Philippine 5. The barrilla, a crude bronze or copper coin worth about one centavo, Islands in 1912. All notes and coins issued up to 1933 used English. was the first coin struck in the country as ordered by the Royalty of Beginning May 1918, treasury certificates replaced the silver Spain. The Filipino term "barya," referring to small change, had its certificates series, and a one-peso note was added. origin in barrilla. 15. Two kinds of notes circulated in the country during the outbreak of 6. Gold coins with the portrait of Queen Isabela were minted in World War II-war notes in high denominations issued by the Japanese Manila. Occupation Forces dubbed as "Mickey Mouse" money and guerrilla notes or resistance currencies in low denominations issued by different 7. Silver pesos with the profile of young Alfonso XIII were the last provinces and municipalities. coins minted in Spain. 16. Old treasury certificates overprinted with the word "Victory" was 8. The pesos fuertes, issued by the country's first bank, the El Banco used as currency when the Philippines gained independence from the Español Filipino de Isabel II, were the first paper money circulated in United States following the end of World War II. the country. 17. With the establishment of the Central Bank of the Philippines in 9. The Philippine Republic of 1898 under General Emilio Aguinaldo 1949, the first currencies issued were the English series notes printed issued its own coins and paper currency backed by the country's by the Thomas de la Rue & Co., Ltd. in England and the coins minted natural resources. Two types of two-centavo copper coins were struck at the US Bureau of Mint. at the Malolos arsenal. 18. The "Filipinization” of the republic coins and notes began in the late 60s and is carried through to the present.  5. A mobile/digital wallet stores payment information on a mobile 19. In the 70s, the Ang Bagong Lipunan (ABL) series notes printed at device, usually in an app that utilizes different technologies in the the Security Printing Plant were circulated starting 1978. payment process. They commonly work through complex encryption and tokenization, a method using time-limited token numbers 20. In 1983, the Flora and Fauna coin series was initially issued. generated to process the specific transaction using your already- encrypted card "stored" in your mobile wallet. 21. The New Design Series of banknotes issued in 1985 replaced the ABL series. 6. Quick response (QR) codes are the trademark of a type of matrix barcode (type 2D barcode) readable by smartphones. This is more 22. Ten years later, a new set of coins and notes were issued carrying secure because your phone, that your card details are securely the logo of the new Bangko Sentral ng Pilipinas. connected to, confirms you are the owner of the card. 7. A QR code has four important advantages: MOBILE PAYMENT AND INTERNET PAYMENTS a. It stores a large volume of data. LESSON SUMMARY b. It can be scanned from a screen, not just paper. 1. Mobile payments are money rendered for a product or service through a portable electronic device, such as a cell phone, smartphone, C. It can be read even if part of the code is damaged. or a tablet device. It can also be used to send money to friends or family members. d. It is safer because information can be encrypted. 2. Near field communication (NFC) payments is the technology that 8. Short message (or messaging) service (SMS), also called premium allows two devices-your phone and a payment's terminal-to process SMS payments, simply means paying for products or services via a contactless payments using close-proximity radio frequency text message with the relevant information to the right payee phone identification. number and the payment amount is added to your mobile phone bill. 3. Sound wave-based (SWB) or sound signal-based (SSB) mobile 9. Direct carrier billing (DCB) is similar to SMS payments because payments or pay-by-sound uses an advanced, ultra-low power, wireless you pay through your mobile carrier instead of using bank or card transmission technology to transmit data via sound waves that details, the payment will then be added to your phone bill or prepaid originate from POS terminals. Any phone with a microphone can pick SIM card as with SMS payments. up those waves to complete a transaction without the need for internet. 10. Internet payments can be done on desktops, laptops, or even 4. Magnetic secure transmission (MST) is when a phone emits a phones (as in mobile payment) and can also be used to send money to magnetic signal imitating the magnetic strip on the payer's credit card, friends or family members. which the card terminal picks up and processes as if a physical card was swiped through the machine. MST is secure as it uses a secure 11. Wireless application protocol (WAP) payments used to be the most tokenization system common facility on smartphones through a more limited-capacity WAP browser or app.  6. Quick response (QR) codes are the trademark of a type of matrix 12. Most credit cards and bank accounts have what we call "auto pay," barcode (type 2D barcode) readable by smartphones used in e- where payments to credit cards or other bills, like for water, electricity, commerce to process payments. or whatever bills need to be paid, are scheduled to be automatically paid on a certain date from funds of the payee with a certain bank. It 7. Short message (or messaging) service (SMS), also called premium can be the bank doing the auto pay or the credit card company. SMS payments, simply means paying for products or services via a text message. 13. Payment links or pay by link is most commonly referring to a button/link sent in an email, text message, messaging app, or over 8. Direct carrier billing (DCB) is similar to SMS payments where you social media where a checkout page opens up in an internet browser enter your phone number on a payment page or in an app and the where the recipient can enter their card details to process a transaction payment will then be added to your phone bill or prepaid SIM card. for a specified merchant. 9. Internet payments can be done on desktops, laptops, or even phones 14. Neobank literally means "new bank," and is from the Greek word (as in mobile payment). neos meaning "new." It is an umbrella term for the new generation of cutting-edge, fully digital newing services. They all operate online or 10. Wireless application protocol (WAP) payments used to be the most through apps; hence, they are classified as a type of financial common facility on smartphones through a more limited-capacity technology (fintech) solution. WAP browser or app. KEY TAKEAWAYS 11. "Auto pay" is done when payments to credit cards or other bills, like for water, electricity, or whatever bills need to be paid, are 1. Mobile payments are money rendered for a product or service scheduled to be automatically paid on a certain date from funds of the through a portable electronic device, such as a cell phone, smartphone, payee with a certain bank, just like a debit card or a tablet device. 12. Payment links or pay by link is most commonly referring to a 2. Near field communication (NFC) payments is the technology that button/link sent in an email, text message, messaging app, or over allows contactless payments using close-proximity radio frequency social media to process a transaction for a specified merchant. identification. 13. Neobank is an umbrella term for the new generation of cutting- 3. Sound wave-based (SWB) or sound signal-based (SSB) mobile edge, fully digital banking services classified as a type of financial payments or pay-by-sound uses an advanced, ultra-low power, wireless technology (fintech) solution. transmission technology. 4. Magnetic secure transmission (MST) makes use of a magnetic signal to process payment using a secure tokenization system. 5. Mobile/digital wallets work through complex encryption and tokenization to process specific transactions.  VIRTUAL CURRENCY 6. Cryptocurrencies use cryptography, the process of protecting information by using codes, for security. It is also used to control LESSON SUMMARY transactions and increase the supply. With this feature, cryptocurrencies have become self-governing and self-regulating. It 1. Cryptocurrency or virtual/digital currency is any type of digital unit provides routine escrow mechanisms that could easily be implemented that is used as a medium of exchange or a form of digitally stored to protect buyers. value generated by agreement within the community of virtual currency users. It is referred to as "digital gold." It is also called 7. However, having no intrinsic value, there are also significant risks "altcoins." Cryptocurrency is digital money-it is virtual and has no associated How cryptocurrencies. Their worth comes from their users. physical form. The more users a coin has, the more useful it becomes, and the higher its price goes Cryptocurrencies only serve to transfer wealth from one 2. Fiat currency or cash, on the other hand, is the real currency. Coins party to another. But when a coin falls out of favor, there is nothing to and paper money (bills) issued and printed by the central bank of a stop it from going to zero and that is the risk. country are fiat currency, fully-backed by the government of a country and is acceptable as payment for public and private debts. 8. China has already developed a Central Bank-backed crypto, and in the US it was discussed as part of the C-19 stimulus. In other words, 3. E-money is a digital representation of fiat currency stored in digital unregulated cryptocurrencies will one day compete against state- wallets or e-wallets. Any amount of currency stored in an electronic sponsored ones, too. wallet (such as GCash, PayMaya, Coins PH, GrabPay, and the like) is e-money, which can also be accepted as a "card payment" or can be 9. Decentralized cryptocoin markets run through a blockchain relying withdrawn right away as cash. on a peer- to-peer protocol. So trading altcoins is done through dozens or even hundreds of independent nodes and masternodes. Transactions 4. Virtual currency, which is stored digitally, would still need to be occur only when the nodes come to a consensus based on the converted first to Philippine peso, then transferred to a destination exchange's verification rules. wallet or be withdrawn as cash through different mediums that are accepted in the country. In general, conversion is done through a 10. When it comes to cryptocurrency exchange websites, however, virtual currency exchange. In the Philippines, cryptocurrencies are centralization remains a core concept. Centralized exchanges are run regulated by the Bangko Sentral ng Pilipinas (BSP). by companies that manage and earn revenue from transactions on the platform. 5. Cryptocurrencies work through blockchain technology. Blockchain is a special kind of database, a "distributed ledger" or a "global ledger" KEY TAKEAWAYS built on a data structure known as "blocks." Blockchain allows all participants to view the records and all the changes that happen in the 1. Cryptocurrency, virtual/digital currency, "digital gold", or "altcoins" database. Your transaction data will be stored in a block, which is are any type of digital unit that is used as a medium of exchange or a technically a list of other transactions made by other people. The block form of digitally stored value generated by agreement within the where your transaction is listed will then be chained to previous community of virtual currency users. blocks. Cryptocurrencies use electronic coins as their form of exchange, which are nothing more than slots in the blockchain. 2. Fiat currency/fiat money or cash is the real currency, coins and CHAPTER 2 paper money (bills) issued and printed by the central bank of a country. INTERNATIONAL TRADE THEORIES 3. E-money is a digital representation of fiat currency stored in digital LESSON SUMMARY wallets or e-wallets. 1. International trade theories are various theories that analyze and 4. Virtual currency, which is stored digitally, would still need to be explain the patterns and mechanisms of international trade, how converted first to Philippine peso, then transferred to a destination countries exchange goods and services, and help countries in deciding wallet or be withdrawn as cash through different mediums that are what should be exported and what should be imported, in what accepted in the country done through a virtual currency exchange. quantity, and with whom trade should be done globally. 5. Cryptocurrencies work through blockchain technology. Blockchain 2. Trade is the concept of exchanging goods and services between two is a special kind of database, a "distributed ledger" or a "global ledger" people or entities. built on a data structure known as "blocks." 3. International trade is the exchange goods and services between 6. Cryptocurrencies use electronic coins as their form of exchange, people or entities in two different countries. which are nothing more than slots in the blockchain. 4. International trade theories were initially company-based and were 7. Cryptocurrencies use cryptography, the process of protecting called classical theories. Classical economists were oriented primarily information by using codes, for security. toward growth economics, and their main concern was to explain how the "wealth of nations" could be increased. 8. The more users a coin has, the more useful it becomes, and the higher its price goes. But when a coin falls out of favor, there is 5. The main points of the classical theories of international trade are nothing to stop it from going to zero. the following: a. Trade is an important stimulator of economic growth. 9. China has already developed a Central Bank-backed crypto. b. Trade tends to promote greater international and domestic equality. C. Trade helps countries to achieve development. 10. The cryptocoin market is decentralized, but cryptocurrency d. In a world of free trade, international prices and costs of productions exchange websites, are centralized determine how much a country should trade in order to maximize its national welfare. e. In order to promote growth and development, self-reliance based on partial or complete isolation is asserted to be economically inferior to participation in a world of free unlimited trade. 6. In the mid-twentieth century, economists shifted from country-based to firm-based or company-based theories, which were called modern theories. These theories are useful and can help with international trade by helping a business determine the right country to expand into and make goods more efficiently than other firms.  MERCANTILISM KEY TAKEAWAYS LESSON SUMMARY 1. International trade theories are various theories that analyze and 1. The "Commercial Revolution" brought a revolutionary change in the explain the patterns and mechanisms of international trade. economy of Europe: the transition from local economies to national economies, from feudalism to capitalism, and from a rudimentary trade 2. Trade is the concept of exchanging goods and services between two to a globally larger international trade. people or entities. 2. This commercial revolution gave birth to mercantilism. According 3. International trade is the exchange goods and services between to the mercantilists, it is the goal of the economy politics to ensure that people or entities in two different countries. the state is enriched by increasing the entry of gold and silver and stocking the country with the same through creating the highest 4. International trade theories were initially company-based and were possible export/trade surplus because exports bring an inflow of gold, called classical theories. whereas imports lead to the outflow of gold. This is the reason mercantilism was also known as "bullionism." 5. Classical economists were oriented primarily toward growth economics, and their main concern was to explain how the "wealth of 3. Mercantilism believes that the state should actively intervene in the nations" could be increased. economy. Countries employed a policy of protectionism-protecting the export industries that bring in the gold and silver through customs 6. The main points of the classical theories of international trade are tariffs, quotas, and the like to curtail imports. the following: 4. The period also marked the rise of new nation-states, whose rulers a. Trade is an important stimulator of economic growth. were able to amass more gold and wealth for their countries by b. Trade tends to promote greater international and domestic equality. increasing exports and trade. These nation-states expanded their wealth C. Trade helps countries to achieve development. by using their colonies around the world in an effort to control more d. In a world of free trade, international prices and costs of productions trade and amass more riches. determine how much a country should trade in order to maximize its national welfare. 5. Mercantilism aimed to encourage production within the national e. Participation in a world of free unlimited trade is economically far territories through the concession of monopolistic privileges granted to better than complete isolation to promote economic development. the export producing enterprises, granting government subsidies, and giving tax exemptions. The importation of advanced technology 7. In the mid-twentieth century, economists shifted from country-based (mostly to benefit the export industries), acquisition of manufacturing to firm-based or company-based theories, which were called modern secrets, and encouraging immigration of skilled workers that will bring theories in remittances to the country were done. Nation-states also placed lots of importance on the development of merchants and naval fleets, which would facilitate exports. 6. In mercantilism, the government strengthens the private owners of the factors of production, which are the following:  10. Adam Smith viewed mercantilism as not freely initiated and did a. Labor refers to the work performed by a person for a monetary not bring benefits to all parties. He refuted the general notion that the consideration. It is the monetary consideration that forms part of the wealth of a nation should be measured by the country's treasury. cost of production. Through his book, Adam Smith illustrated that a freely conducted trade (free trade) was much better than the mercantile doctrine as it would b. Natural resources are those found in nature, including land, trees, benefit most parties. and mines. 11. Free trade is a system that allowed for liberalization which would C. Capital goods (capital) - consist of those goods which are produced pave the way for a freely initiated trade and engage the maximum by the economic system and are used as inputs in the production of possible number of people bringing benefits to most parties and lead to further goods and services. Capital refers to the money or funds used further development of all participants in the long run. to purchase the goods used in the production process. 12. Laissez-faire economics is a theory that restricts government d. Entrepreneurship - the entrepreneur is the one that combines the intervention in the economy. Smith demonstrated that the free market factors in the correct proportion and mobilizes them. would translate into an all-encompassing economic development in a significantly wider sense than mercantilism. 7. Although mercantilism is one of the oldest trade theories, it remains part of our modern life. Countries such as Japan, China, Singapore, 13. Smith also developed the concept of specialization leading to the Taiwan, and even Germany still favor exports and discourage imports development of economies of scale, creating efficiency with the through a form of neo- mercantilism, protectionism through tariffs and ultimate effect of achieving sustainable growth. For him, the collusive import barriers and domestic industry protection through subsidies and relationship between the government and the business class observed tax exemptions. in the mercantile system was detrimental to the citizenry. 8. Free trade advocates highlight how free trade benefits all members 14. Adam Smith described mercantilism as having the following of the global community, while mercantilism's protectionist policies characteristics: only benefit select industries at the expense of both consumers and other companies both within and outside the industry. Free trade is a. It was used to enhance the economic power of states through when international trade is free from barriers, such as tariffs, quotas, or building wealth, an important measure of which was precious metals, other restrictions, and can flourish on its natural growth. It requires especially silver and gold. less government regulatory power. b. It led to massive and rapid unification of control of countries under 9. The proponents of the theory were Sir William Petty and Sir strict economic and political policies, in sharp contrast with what was Thomas Mun in England, Jean-Baptiste Colbert, Jean Bodin, Irish- observed under feudalism resulting in economic nationalism. born Richard Cantillon, and Lord Antoine de Montchrétien in France, and Antonio Serra and Giovanni Botero in Italy, although they never C. The countries aggressively sought to have a favorable balance of used the term themselves. It was the Scottish economist Adam Smith, trade by selling more than they imported so as to have a surplus of in his Wealth of Nations (1776), who gave currency to the term. precious metals and accumulate it over time. 15. Jean-Baptiste Colbert was considered as a more profound influence raw materials and exporting finished products to maintain a favorable on the development of mercantilism in France, where it was known as balance of trade. "Colbertism." Jean-Baptiste's system was very similar in concept and application to mercantilism described by Adam Smith. He carried out 21. Physiocrats is an eighteenth-century group of French economists the program of economic reconstruction that helped make France the who believed that agriculture was the source of all wealth and that dominant power in Europe. agricultural products should be highly priced. Advocating adherence to a supposed natural order of social institutions, they also stressed the 16. Sir William Petty posits that surplus gain or surplus value leads to necessity of free trade. expanded reproduction and that expanded reproduction is conditional on capital accumulation (productive capital expansion). Expanded 22. The price-specie-flow mechanism was originally attributed to reproduction is a model in which a capitalist economy smoothly Scottish economist David Hume to illustrate how trade imbalances can reproduces itself. The surplus value created by the workers is not self-correct and adjust under the gold standard. Fluctuations in prices merely realized but reinvested. in a country adjusted completely or partially by an inflow or outflow of gold or specie which adjusts the price levels across borders and 17. Philipp Wilhelm von Hornick, in his Austria Over All, If She Only equalized them bringing balance in international transactions and Will of 1684, detailed a nine-point program of what he deemed payments. effective national economy, which sums up the tenets of mercantilism comprehensively. 23. Giovanni Botero and Antonio Serra of Italy did not directly touch on mercantilism, but developed theories using the city as a unit of 18. Sir Thomas Mun was most closely associated with the idea of analysis and finding development to be the result of industrialization mercantilism in England, where Mercantilism was called commercial system or mercantile system, because it emphasized the importance of KEY TAKEAWAYS commerce and free trade. This school of thought mainly focused on international trade and the balance of trade through acquisition of 1. The "Commercial Revolution" saw the transition from local silver and gold. economies to national economies, from feudalism to capitalism, and from a rudimentary trade to a globally larger international trade. 19. Antoine de Montchrétien published a book titled A Tract on Political Economy in which he laid great emphasis on development of 2. According to mercantilism, also known as "bullionism," it is the agriculture and described it as the basis of all wealth. He stood for the goal of the economy politics to ensure that the state is enriched by principle of self-sufficiency and asserted that it is not the abundance of increasing the entry of gold and silver. Exports bring an inflow of gold, gold and silver, the quantities of pearls and diamonds, which make a whereas imports lead to the outflow of gold. state rich and opulent, but the convenience of the things necessary to life. 3. Countries employed a policy of protectionism; the country tried to protect the export industries that brings in the gold and silver. 20. Richard Cantillon is considered by many to be the first economic theorist. His only known book, Essai sur la Nature du Commerce en 4. New nation-states practiced colonization where one country takes General (the Essai), may represent one of the single largest steps control of another country or region. These nation-states expanded forward in the social sciences. He emphasized the need of importing their wealth by using their colonies around the world in an effort to control more trade and amass more wealth.  degree of efficiency that would lead to the development of economies 5. Entrepreneurship - The entrepreneur is the one that combines the of scale. factors in the correct proportion and mobilizes them. 16. Economies of scale occur when increasing output leads to lower 6. Capital goods - These consist of those goods which are produced by long-run average costs. It means that as firms increase in size, they the economic system and are used as inputs in the production of become more efficient. further goods and services. 17. Jean-Baptiste Colbert was considered as a more profound influence 7. Capital - This refers to the money or funds used to purchase the on the development of mercantilism in France, where it was known as goods used in the production process. "Colbertism." 8. Natural resources mines. These are found in nature, including land, 18. Sir William Petty posited that surplus gain is the fundamental trees, and originator of expanded reproduction, which is conditional on capital accumulation. 9. Labor This refers to the work performed by a person for a monetary consideration. It is the monetary consideration that forms part of the 19. Philipp Wilhelm von Hornick, in his Austria Over All, If She Only cost of production. Will of 1684, detailed a nine-point program of what he deemed effective national economy, which sums up the tenets of mercantilism 10. In our modern times, the four factors of production are land, labor, comprehensively. capital, and entrepreneurship. 20. Sir Thomas Mun wrote a pamphlet, A Discourse of Trade in 11. Neo-mercantilism, therefore, combines protectionism through England, where mercantilism was called commercial system or tariffs and import barriers and domestic industry protection through mercantile system. subsidies and tax exemptions. 21. Antoine de Montchrétien published a book titled A Tract on 12. Free trade is when international trade is free from barriers, such Political Economy in which he laid great emphasis on development of tariffs, quotas, or other restrictions, and can flourish on its natural agriculture and described it as the basis of all wealth. growth free from government regulatory intervention. 22. Richard Cantillon is considered by many to be the first economic 13. Free trade is a system that allowed for liberalization which would theorist. He emphasized the need of importing raw materials and pave the way for a freely initiated trade and engage the maximum exporting finished products to maintain a favorable balance of trade. possible number of people bringing benefits to most parties and lead to further development of all participants. in the long run. 23. Physiocrats is an eighteenth-century group of French economists who believed that agriculture was the source of all wealth and that 14. Laissez-faire economics is a theory that restricts government agricultural products should be highly priced. intervention in the economy. 24. Giovanni Botero and Antonio Serra of Italy did not directly touch 15. Specialization is a method of production whereby an entity focuses on mercantilism, but developed theories using the city as a unit of on the production of a limited number of goods to gain a greater analysis and finding development to be the result of industrialization.  THEORY OF ABSOLUTE ADVANTAGE 8. Like the physiocrats, Smith recommended leaving economic LESSON SUMMARY decisions to the free play of self-regulating market forces, with the state playing a highly limited role. 1. resources Absolute advantage means a producer can produce a good or service better faster, more efficiently, at a greater volume, and with 9. Smith did not believe that industry was unproductive and that only fewer others. It means that a producer can produce a good or service at the agricultural sector was capable of producing a surplus above the lesser marginal cost than other producers. If a country has more subsistence level. Smith saw that division of labor and extension of resources needed to produce a good or service, it has absolute markets created almost limitless possibilities for society to expand its advantage over a country who does not have those resources. than wealth through production and trade. 2. Marginal cost is the cost incurred in producing an additional unit of 10. The theory of absolute advantage believes that countries should a product. produce and export such products which they have an absolute advantage on and import those goods that they produce relatively less 3. Adam Smith is recognized as the founder of modern economics; efficiently and at a higher cost. hence, considered as the father of economics. He is credited with using the word mercantilism first and that his book The Wealth of Nations 11. Smith used the concept of absolute advantage to explain gains from marked the birth of modern capitalism. free trade in the international market. He upheld in this theory the necessity of free trade as the only sound guarantee for progressive 4. Capitalism, also called free market economy or free enterprise expansion of trade and increased prosperity of nations. economy is an economic system, where most means of production are privately owned and production is guided and income distributed 12. According to Smith, free trade promotes international division of largely through the operation of markets, which determine prices, labor through specialization in the production and exchange of such products, and services rather than the government. commodities, in case of which they command some absolute advantage. Specialization increases productivity through technical and 5. Modern capitalism emerged as a result of the appearance of the organizational innovations. physiocrats in France. The physiocrats were a group of economists who believed that the wealth of nations was derived solely from 13. An interesting aspect of Smith's analysis of trade has been his vent agriculture; that only agriculture yielded a surplus. for surplus doctrine, which advocates nations exchanging their overproduction for other goods which are in demand in other 6. Physiocracy is perhaps the first well-developed theory of countries. In addition, this doctrine implies that the foreign trade economics. It immediately preceded the first modern school, classical results in the fullest utilization of the idle productive capacity that is economics. The physiocrats believed that the wealth of a nation lies likely to exist in the absence of trade. not in its stocks of gold and silver, but rather in the size of its net product. 14. Smith also mentioned an additional beneficial aspect of international trade- it transfers knowledge and technology between 7. Net product, a measure of the income generated in a production different nations. The adoption and use of new production techniques process, is the value of outputs minus the value of inputs. lead to productivity growth and, thus, to an increase in wealth and economic development. KEY TAKEAWAYS 10. An additional beneficial aspect of international trade is it transfers knowledge and technology between different nations 1. Absolute advantage means that a producer can produce a good or service in greater quantity for the same cost or the same quantity at a THEORY OF COMPARATIVE ADVANTAGE lower marginal cost. LESSON SUMMARY 2. Marginal cost is the cost incurred in producing an additional unit of 1. Comparative advantage means a producer can produce a good or product. service at a lower opportunity cost than others. If a country can produce goods or services at a lower cost than other countries, it has 3. Adam Smith is recognized as the father of economics. comparative advantage. A country has comparative advantage when it produces a good or service for a lower opportunity cost than other 4. Capitalism, also called free market economy or free enterprise countries. economy is an economic system, where most means of production are privately owned and production is distributed through the operation of 2. Opportunity cost is what is lost or missed out on when choosing one markets, which determine prices, products, and services. possibility over another. 5. The physiocrats were a group of economists who believed that the 3. While the theory of comparative advantage is attributed to Ricardo, wealth of nations was derived solely from agriculture; that only Adam Smith was among the first to put in writing the theory of agriculture yielded a surplus. comparative advantage. 6. The theory of absolute advantage believes that countries should 4. For Smith, the specialization and division of labor, in the emerging produce. The export such products which they have an absolute large-scale industries of his homeland England, provided the base for advantage on and import those goods where they do not have absolute lowering labor costs, which ensured effective competition across advantage. countries. 7. The theory of absolute advantage, theory of international trade, and 5. The extent of specialization and division of labor was dependent theory of economic development are closely interwoven and upon the size of the market. A larger market would encourage a greater interlinked. degree of specialization and division of labor; hence, the development of international trade. 8. Free trade promotes international division of labor through specialization giving certain countries absolute advantage paving the 6. The classical theorists believe that each country will specialize in way for international trade that wil bring about economic the production of those goods for the production of which it is development. especially suited on account of its climate, of the qualities of its soil, of its other natural resources, of the innate and acquired capacities of its 9. Vent for surplus doctrine states that a nation can exchange its people, and of the real capital which it possesses as a heritage from its overproduction for other goods which are in demand in other past generation, such as buildings, plants and equipment, and means of countries, which will result in the fullest utilization of the idle transport. productive capacity. 7. Industrial capitalism is an economic system in which trade, industry, and capital are privately controlled and operated for profit. It saw the 13. In older economic terms, comparative advantage has been opposed by rapid development of the factory system of production characterized mercantilism and economic nationalism. They argue that while a country by much more rigid, complex, and intricate division of labor that may initially be comparatively disadvantaged in a given industry, countries Smith was propounding. should shelter and invest in industries until they become globally competitive. 8. Free trade, as opposed to the mercantilist policies of protection, was championed by both Smith and Ricardo as a route to achieve KEY TAKEAWAYS production efficiency at a global level. Ricardo's cost calculations were 1. Comparative advantage means a producer can produce a good or based on labor hours, which were treated as a single homogeneous service at a lower opportunity cost than others. input. 2. Opportunity cost is what is lost or missed out on when choosing one 9. It was comparative advantage which was considered both necessary possibility over another. to ensure mutually gainful international trade across borders warranting complete specialization in the specific commodity with a 3. Adam Smith was among the first to put in writing the theory of comparative advantage in terms of labor hours used per unit of output. comparative advantage, but the theory of comparative advantage was formulated by David Ricardo. 10. The theory of comparative advantage was formulated by David Ricardo when he investigated in detail the advantages and alternative 4. For Smith, the specialization and division of labor provided the base or relative opportunity in his 1817 book On the Principles of Political for lowering labor costs, which ensured comparative advantage for a Economy and Taxation in an example involving England and Portugal. country. He argued that a country boosts its economic growth the most by focusing on the industry in which it has the most substantial 5. Industrial capitalism is an economic system in which trade, industry, comparative advantage. According to his comparative advantage and capital are privately controlled and operated for profit. principle, developing countries with a comparative advantage in agriculture should continue to specialize in agriculture and import 6. Comparative advantage warranted complete specialization in the high-technology widgets from developed countries with a comparative specific commodity with a comparative advantage in terms of labor advantage in high technology. hours used per unit of output. 11. David Ricardo started out as a successful stockbroker, making $100 7. David Ricardo started out as a successful stockbroker, making $100 million in today's dollars. After reading Adam Smith's The Wealth of Nations, million in today's dollars. After reading Adam Smith's The Wealth of he became an economist. He pointed out that significant increases in the Nations, he became an economist. money supply created inflation in England in 1809. Ricardo developed the theory of monetarism, the theory or practice of controlling the supply of 8. Ricardo developed monetarism, the theory or practice of controlling money as the chief method of stabilizing the economy. the supply of money as the chief method of stabilizing the economy. 12. Ricardo also developed the law of diminishing marginal returns, 9. He also developed the law of diminishing marginal returns, which which states that there is a point in production where the increased states that there is a point in production where the increased output is output is no longer worth the additional input. no longer worth the additional input.  HECKSCHER-OHLIN THEORY (H-O THEORY) 2. Swedish economists, Eli Heckscher and his student Bertil Ohlin, LESSON SUMMARY studied how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country and 1. David Ricardo's theory of comparative advantage posits that propounded the Heckscher-Ohlin theory or H-O theory, also called the countries export the goods they have abundant production factors for, factor proportions theory. while they import the goods for which they have scarce production factors. Relative intensities of production factors (land, labor, and 3. Hecksher and Ohlin determined that the cost of any factor or capital) determine the comparative advantage of a country. resource was a function of supply and demand. 2. Using the above premise as a starting point, two Swedish 4. Countries with cheap labor would specialize in labor-intensive economists, Eli Heckscher and his student Bertil Ohlin, from industries, while countries that have large pools of capital would Stockholm School of Economics, in the 1920s, studied how a country specialize in capital-intensive industries. could gain comparative advantage by producing products that utilized factors that were in abundance in the country. 5. International trade can improve economic efficiency, but that trade will also cause a redistribution of income between different factors of 3. The Heckscher-Ohlin theory or H-O theory is based on a country's production; some will gain from trade, some will lose, but the net production factors-land, labor, and capital; hence, the theory is also effects are still likely to be positive called the factor proportions theory or the resources and trade theory. Hecksher and Ohlin determined that the cost of any factor or resource was a function of supply and demand. 4. Many elaborations of the model were provided by Paul Samuelson after the 1930s and thus, sometimes the model is referred to as the Heckscher-Ohlin- Samuelson (HOS) model. 5. In the 1950s and 1960s, some noteworthy extensions to the model were made by Jaroslav Vanek, and so occasionally the model is called the Heckscher-Ohlin-Vanek model. KEY TAKEAWAYS 1. David Ricardo's theory of comparative advantage posits that countries export the goods they have abundant production factors for, while they import the goods for which they have scarce production factors, which determine the comparative advantage of a country.