Chapter 5: International Trade Theories

Mercantilism

The economic theory that views international trade as a zero-sum game, advocating for government intervention to promote exports and limit imports.

Zero-Sum Game

A situation in which one party’s gain is exactly balanced by another party’s loss.

Protectionism

Government policies that restrict imports and encourage exports to protect domestic industries.

Trade Surplus

A condition in which a nation exports more than it imports.

Trade Deficit

A condition in which a nation imports more than it exports.

Absolute Advantage

The ability of a country to produce a good more efficiently than another country.

Comparative Advantage

The ability of a country to produce a good at a lower opportunity cost than another country, even if it lacks absolute advantage.

Free Trade

The idea that market forces should determine trade flows with minimal or no government intervention.

Factor Endowment Theory (Heckscher–Ohlin Theory)

A theory stating that nations will export goods that use their abundant factors of production and import goods that use their scarce factors.

Product Life Cycle Theory

A theory that patterns of trade change over time as new products are introduced, mature, and are standardized.

Strategic Trade Theory

A theory suggesting that governments can enhance national advantage by supporting industries important for future competitiveness.

National Competitive Advantage of Industries (Porter’s Diamond Theory)

A theory identifying four factors that shape national competitiveness: factor endowments, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry.

Nontariff Barrier (NTB)

A trade barrier that restricts imports or exports through means other than tariffs, such as quotas or local content requirements.

Tariff

A tax imposed on imports or exports to protect domestic producers or raise revenue.

Import Quota

A quantitative restriction on the amount of goods that can be imported.

Subsidy

Government financial assistance to domestic firms to make them more competitive internationally.

Voluntary Export Restraint (VER)

An agreement by an exporting nation to limit the quantity of its exports, often to avoid trade sanctions.

Local Content Requirement

A regulation that requires a certain proportion of a product’s value to be produced domestically.

Free Trade Agreement (FTA)

A pact between two or more countries to reduce or eliminate trade barriers.

Trade Policy

Government actions that influence the flow of goods and services across borders.

Dumping

Selling goods abroad at below production cost or below home-market price to gain market share.

Antidumping Duty

A tariff levied to counteract the effects of dumping by foreign producers.

Infant Industry Argument

The justification that emerging domestic industries need protection from international competition until they become competitive.

Comparative Institutional Advantage

The advantage that arises from a country’s institutional setup supporting certain industries or skills.

Balance of Trade

The difference between the value of a country’s exports and imports of goods over a specific period.

Invisible Hand

Adam Smith’s concept that individuals pursuing their own interests indirectly benefit society through market efficiency.

Division of Labor

The specialization of production tasks, leading to efficiency and innovation.

Opportunity Cost

The value of the best alternative foregone when a choice is made.

Innovation-Based Trade Theory

The idea that trade advantages arise from technological innovation and intellectual property rather than resource endowments.