Download - Chapter 2
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Chapter 2
Trade Theories and Economic Development
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Chapter Outline
Basis for International Trade
- Production Possibility Curve
- Principle of Absolute Advantage
- Principle of Comparative/Relative Advantage Exchange Ratios, Trade, and Gain Factor Endowment Theory
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Chapter Outline
The Competitive Advantage of Nations A Critical Evaluation of Trade Theories
- The Validity of Trade Theories
- Limitations and Suggested Refinements Economic Cooperation
- Levels of Economic Integration Economic and Marketing Implications
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Basis for International Trade
Principle of Absolute Advantage
- a country should export a commodity that can be produced at a lower cost than can other nations
- or import a commodity that can only be produced at a higher cost than can other nations
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Basis for International Trade
Principle of Comparative/Relative Advantage
- a country should export either a product with the greatest comparative advantage (or with the least comparative disadvantage)
- or import either a product for which it has the greatest comparative disadvantage (or the least comparative advantage)
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Factor Endowment Theory
Factors of Production- labor- land - capital- others (technology, education, etc.) inequality of relative prices is a function of regional
factor endowments comparative advantage is determined by relative
abundance of such endowments
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Michael PorterThe Competitive Advantage of Nations
Determinants of International Competitiveness
- factor conditions- demand conditions- related and supporting industries- firm strategy, structure, and rivalry- chance- government
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Validity of Trade Theories
Leontief Paradox– Tendency for countries with similar endowments
to trade among themselves Offshoring Factor Mobility and Substitution Demand Marketing Trade Barriers
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Levels of Economic Cooperation
Free Trade Area Customs Union Common Market Economic and Political Union Political Union
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Economic Cooperation
Free Trade Area- elimination of internal duties Customs Union- free trade area + establishment of common
barriers Common Market- customs union + removal of restrictions on
movement of production factors
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Economic Cooperation
Economic and Monetary Union
- common market
- + harmonization of national economic policies
- + one money Political Union
- harmonization of national political policies