Chapter 6: International Trade Theory

What does Mercantilism advocate for in trade policy?

Government involvement to promote exports and limit imports

What is the primary goal of a country according to Mercantilism?

To maintain a trade surplus by exporting more than importing

What is considered a key component of national wealth in Mercantilism?

Gold and silver

According to Mercantilism, how is trade viewed?

As a zero-sum game

What is Absolute Advantage in trade?

A country's ability to produce a product more efficiently than any other country

Who proposed the concept of Absolute Advantage?

Adam Smith in 1776

What does the theory of Comparative Advantage suggest?

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

What was Ricardo’s contribution to trade theory in 1817?

The concept of Comparative Advantage

What is the Heckscher-Ohlin theory centered on?

Factor endowments and how they affect trade

What did Leontief's Paradox illustrate about U.S. exports?

U.S. exports were less capital intensive than US imports despite being capital abundant

Who proposed the International Product Life Cycle theory?

Ray Vernon in the mid-1960s

What is a key outcome of the New Trade Theory?

Trade can increase the variety of goods and decrease average costs

What are First-mover advantages in trade?

Economic and strategic advantages that accrue to early entrants into an industry

What does Michael Porter’s theory of national competitive advantage explain?

A nation's dominance in production and export of certain products is due to country factors.

How did Michael Porter’s Diamond model of national competitive advantage reflect a nation’s resources?

It reflects differences in national factor endowments, like land, labor, and capital

What is the initial theory that explains why unrestricted free trade is beneficial?

Heckscher-Ohlin

The theory of __ was the first to explain why unrestricted free trade benefits a country.

Absolute advantage

What motivates nations to trade with each other?

Nations trade to realize gains from trade

What is the primary argument for unrestricted free trade according to many economists?

Unrestricted free trade will raise the economic welfare of participating countries

What was Adam Smith's contribution to trade theory?

He promoted unrestricted free trade

What does Paul Krugman's new trade theory emphasize?

The world market can only support a limited number of firms in some industries, leading to trade skewed towards first mover advantages

What is the Heckscher-Ohlin theory?

Comparative advantage reflects differences in national factor endowments, such as land, labor, and capital

How does the Product Life-Cycle Theory describe trade?

Trade patterns change as products mature, impacting their production location