global 6

What is mercantilism?

A theory that national wealth and power grow when a country exports more than it imports and accumulates gold and silver.

What is a trade surplus?

A situation in which the value of a country’s exports is greater than the value of its imports.

Why did mercantilism remain popular?

Governments believed trade surpluses increased national wealth, political power, security, and prestige.

What is the main weakness of mercantilism?

It treats trade as a zero-sum game and ignores the possibility that both countries can gain from trade.

What is absolute advantage?

The ability of a country to produce a good more efficiently, using fewer resources, than another country.

Who developed the theory of absolute advantage?

Adam Smith.

What does absolute advantage recommend?

Countries should specialize in goods they produce most efficiently and trade for other goods.

What is comparative advantage?

The ability to produce a good at a lower opportunity cost than another country.

Who developed the theory of comparative advantage?

David Ricardo.

What is opportunity cost?

The value of the next-best alternative that is given up when making a choice.

What is the difference between absolute and comparative advantage?

Absolute advantage concerns production efficiency; comparative advantage concerns lower opportunity cost.

Can trade benefit both countries if one is more efficient at producing everything?

Yes. Each country should specialize according to comparative advantage, not absolute advantage.

What is Samuelson’s critique of free trade?

A wealthy country may lose long-term gains if trade lowers its real wages after another country develops similar productive abilities.

What are factor endowments?

A country’s supply of production factors, including land, labor, capital, skills, and natural resources.

What is the Heckscher-Ohlin theory?

Countries export goods that use abundant local factors and import goods that use scarce local factors.

What should a labor-abundant country export?

Labor-intensive goods.

What should a capital-abundant country export?

Capital-intensive goods.

What is the Leontief paradox?

The finding that U.S. exports were less capital-intensive than expected, despite the United States being capital-abundant.

What does the Leontief paradox suggest?

Factor endowments alone cannot fully explain international trade patterns.

What is product life-cycle theory?

The location of production and trade changes as a product moves from introduction to maturity and standardization.

How does production move during the product life cycle?

It often begins in an advanced country, spreads to other advanced countries, and later moves to lower-cost developing countries.

How can the product life cycle change trade?

The original innovating country may change from exporting the product to importing it.

What is new trade theory?

A theory that economies of scale and first-mover advantages can allow a small number of firms to dominate global industries.

What are economies of scale?

Reductions in average production cost that occur when a firm increases its output.

How does global trade support economies of scale?

Access to world markets allows firms to sell more, produce at a larger scale, and reduce average costs.

What is a first-mover advantage?

An advantage gained by entering an industry early, such as lower costs, experience, technology, or customer loyalty.

How can companies use new trade theory?

They can enter promising industries early, expand quickly, build scale, and create barriers to later competitors.

What is strategic trade policy?

Government support intended to help domestic firms gain first-mover advantages in important global industries.

What is Porter’s National Diamond?

A framework explaining why firms from certain countries succeed internationally in particular industries.

What are the four parts of Porter’s Diamond?

Factor conditions; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry.

What are factor conditions?

The skills, infrastructure, capital, technology, knowledge, and resources available to an industry.

What are demand conditions?

The size and sophistication of domestic demand, especially how strongly customers pressure firms to improve.

What are related and supporting industries?

Strong local suppliers and connected industries that provide inputs, knowledge, skills, and innovation.

What is firm strategy, structure, and rivalry?

The way domestic firms are organized and managed, and the strength of competition among them.

Which Porter Diamond factor creates pressure for innovation and quality?

Demand conditions, because sophisticated domestic customers demand better products.