IBUS 201 – Topic 7 – Trade Theories – Flashcards

- the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state - the belief that national prosperity is the result of a positive balance on trade, achieved by maximising exports and minimising imports

- High tariffs, especially on manufactured goods - Export subsidies - Exclusive trade with colonies - Restricting domestic consumption with non-tariff barriers to trade

- Trade-surplus country and trade-deficit country co-exist - Trade should not be a zero-sum game - Damages other trading countries - Also anti-consumer, anti-domestic business

- A country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it - A country benefits by producing only those products in which it has absolute advantage, or can produce using fewer resources than another country - A country should never produce goods at home that it can buy at a lower cost from other countries

- Countries having no absolute advantages or having the advantage in all good still can/should trade - Countries should specialise in the production of goods and services they can produce relatively more efficiently

- transportation costs - government intervention (protectionism, subsidy) - created resources (economies of scale) - technological advancements - rise of services in 'exports' - pricing, exchange rate

- the extent to which a country is endowed with such resources as land, labour and capital - The more abundant a factor, the lower its cost and comparative advantages arise

- Explains trade pattern by focusing on the differences in countries' factor endowments, rather than productivity/efficiency - Favoured by economist, easy to interpret e.g. NZ's dairy products

International trade is complex and cannot be fully explained by a single theory

- 3 life-cycle stages: Focuses on timing of innovation, economies of scale, roles of ignorance and uncertainty - Introduction: innovation, mainly serves domestically, great profitability - Maturing: produced in other developed countries, having same demand for product Standardisation: begin production in many countries, including developing, due to cost-driven nature

- Focus on nature of product & competition (innovativeness & cost), technology transfer & market demand - However is it is an ethnocentric theory, challenged by the evolving global business environment: US is not the only innovator, new products are now introduced in developing countries in the first stage

Depends on the collective competitive advantages of the nation's firms, and the relationship is reciprocal over time

Factor conditions: - basic - natural resources, climate - advanced - communication, infrastructure Demand conditions: - demand at home - firms sensitive to needs of closest customers - demanding & sophisticated home customers pressure firms to become competitive Related & supporting industries: - presence of internationally competitive suppliers - phenomenon of clustering e.g. Silicon Valley Firm strategy, structure & rivalry: - nations characterised by different management ideologies e.g. family owned in China - association between domestic rivalry and the creation of competitive advantage in an industry e.g. Japan's car industry

- If correct, model should predict international trade - Remains under-tested - Theory needs to be extended by incorporating an international dimension (e.g. born globals, international demand & competition) - Implications on 'national industrial policy'

Government implements an economic development plan, often in collaboration with the private sector, that aims to develop or support particular industries within the nation - tax incentives, education, monetary & fiscal policies - explain firms' dominance in the market - help other related industries develop

Key concept: Economies of scale 'cost advantages associated with large scale production' Proposition: Firms attempt to increase economies of scale by entering foreign markets - trade allows firm to increase product variety and reduce costs so that firms compete more successfully in the international market Therefore: Pattern of trade may be the result of economies of scale

- Suggests specialisation, lowering costs and high productivity - Claims that countries can still benefit from trade even when there is no difference in resource endowments and technology

1. Domestic Focus 2. Pre-export Stage 3. Experimental Involvement 4. Active Involvement 5. Committed Involvement