International Trade Theory Vocabulary

Flashcards summarizing key vocabulary from the International Trade Theory lecture.

Free Trade

A situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country.

no

has there ever really been a true example of “free trade”? has there been a shift toward more free trade?

trade theory

tries to show why it is beneficial for country X to trade with country Y

specialize

international trade allows a country to ______ in manufacture and export of products it can produce efficiently

consumers

free trade may be negative for domestic manufacturers, but it is beneficial for ______

competition

tariffs are beneficial for domestic manufacturers, but can cause problems for consumers by reducing _______

government

domestic producers will use their lobbying power to influence the _______ to limit free trade

natural resources

most obvious reason why certain countries export certain products is because they have access to _______

Mercantilism

Suggests that it is in a country’s best interest to maintain a trade surplus—to export more than it imports and advocates government intervention to achieve a surplus in the balance of trade and views trade as a zero-sum game.

exploration

mercantilism coincided with european _______, which made the world realize that trade was essential for national power; dominated by portuguese, british, spanish, etc. as they found new markets

realism

says that every government will look at foreign relations/trade relationships as part of theirnational security strategy to improve prosperity and influence.

Absolute Advantage

Adam Smith said a country is more efficient than any other country in producing a specific product

wealth

why is trade beneficial? trade produces _______

distributed

trade theory explains the generation of wealth, but doesn’t explain how it is _______

Comparative Advantage

David Ricardo said countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries, even if this means buying goods from other countries that they could produce more efficiently at home.

competitive advantage

Michael porter said that there are four factors that promote or impede the creation of ______

Heckscher-Ohlin Theory

Comparative advantage arises from differences in national factor endowments (the extent to which a country is endowed with resources like land, labor, and capital) and the pattern of trade is determined by factor endowments.

Product Life-Cycle Theory

As products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade. Initially, the product would be produced and sold in the U.S. and as demand grew in other developed countries, U.S. firms would begin to export.

New Trade Theory

The ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade.

First-Mover Advantages

The economic and strategic advantages that accrue to early entrants into an industry.

Porter’s Diamond of Competitive Advantage

Factor Endowments, Demand Conditions, Relating and Supporting Industries, Firm Strategy, Structure and Rivalry; these four factors are interdependent

Factor Endowments

A nation’s position in factors of production necessary to compete in a given industry which can lead to competitive advantage and can be either basic (natural resources, climate, location) or advanced (skilled labor, infrastructure, technological know-how).

dependent

countries that may be natural resource-rich are still poor because they are overly ______ on that one product

Demand Conditions

The nature of home demand for the industry’s product or service; influences the development of capabilities where sophisticated and demanding customers pressure firms to be competitive.

Relating and Supporting Industries

The presence or absence of supplier industries and related industries that are internationally competitive which can spill over and contribute to other industries.

Firm strategy, structure, and rivalry

The conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry; vigorous domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced features.

Balance of Payments

A country’s balance-of-payments accounts keep track of the payments to and receipts from other countries for a particular time period by double entry bookkeeping.

Current Account

Records transactions of goods, services, and income, receipts and payments.

Capital Account

Records one time changes in the stock of assets.

Financial Account

Records transactions that involve the purchase or sale of assets.