Terms Chapter 2

Mercantilism

a theory of international trade that supports the premise that a nation could only gain from trade if it had a trade surplus, that is, more exporting than importing.

The oldest form of trade theory

Practiced during the 1500-1750 period as Europe emerged from the feudal systems of the Middle Ages and moved toward nationalism.

Adam Smith

known as the father of free market and open trade systems, recognized the absurdity of mercantilism during the mid-18th century

international trade theory was his belief that free trade encourages countries to specialize in the production of those goods and services that they most efficiently produce.

Absolute Advantage

is the ability of one country to produce a good or service more efficiently than another.

It means that a producer can produce a good or service in greater quantity for the same cost or the same quality at a lower cost or the producer can produce the same quantity of product/service for a lesser quantity of inputs, and, therefore, lower marginal costs that other producers without compromising the quality.

Comparative Advantage

is the ability of one country that has an absolute advantage in the production of two or more goods (or services) to produce one of them relatively more efficiently than the other.

refers to the country's capability to produce specific goods or manufacture multiple types of goods with limited resources at lower marginal cost and opportunity cost compared to other countries.

Factor Endowment

the quantity and quality of factors of' production (land, labor, capital, and technology) that a country owns

Eli Hecksher and Bertil Ohlin

two Swedish economists who refined David Ricardo's theory of comparative advantage and showed that nations primarily export goods and services that intensely use their abundant factors of production.

Hecksher-Olin Theory

theory attributes the comparative advantage of a nation to its factor endowments: land (quantity, quality, and mineral resources beneath it), labor (quantity and skills), capital (cost), and technology (quality).

Factor Price Equalization Theory

states that when factors are allowed to move freely among trading nations, efficiency further increases, which leads to superior allocation of the production of goods and services among countries.

The theory (attributed to Paul A. Samuelson) that when factors of production are allowed to move freely among nations as a result of international trade, the prices of identical factors of production will be equalized across said nations.

Porter’s Diamond Model of National Competitive Advantage

Porter neatly explains his model in terms of a "diamond" that consists of four groups of company-specific and country-specific characteristics positioned at the edge of a diamond.

Porter's model also explains that the interaction of these four groups of characteristics will determine a county's competitive advantage in the global arena.

Trade Policy

refers to all government actions that seek to alter the size of merchandise and/or service flows from and to a country.

The main instrument has been import tariffs and quotas; however, more recently, nontariff barriers and export subsidies have become equally important in international business.