Trading Internationally (Ch. 5)

absolute advantage

- economic advantage one nation enjoys that is absolutely superior to other nations - for example, Portugal enjoyed an absolute advantage over England in the production of grapes and wine because of better soil

According to Michael Porter, what factors contribute to a country's competitiveness?

- firm strategy, structure, and rivalry - domestic demand conditions - related and supporting industries - country resource endowments

How can the product life cycle explain the patterns of international trade?

- it assumes that the USA will always be the lead innovation nation for new products - it assumes a stage-by-stage migration of production that takes at least several years (if not decades).

What are key political arguments against free trade?

- national security - consumer protection - foreign policy - environmental and social responsibility

What do the key terms in international trade mean?

Mercantilism - Absolute advantage - comparative advantage - product life cycle - strategic trade- national competitive advantage

What are the strengths and weaknesses of the main theories of international trade?

Mercantilism: - advantage: forerunner of modern day protectionism - disadvantage: inefficient allocation of resources Absolute advantage: - advantage: birth of modern economics; forerunner of the free trade movement; defeats mercantilism, at least intellectually - disadvantage: when one nation is absolutely inferior to the other, the theory is unable to provide any advice; when there are many nations, it may be difficult to find an absolute advantage Comparative advantage: - advantage: more realistic guidance to nations interested in trade but having no absolute advantage - disadvantage: relatively static, assuming that comparative advantage and factor endowments do not change over time

comparative advantage

- relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations - nation A has an absolute advantage in production of all goods compared to Nation B. As long as Nation B is not equally less efficient in the production of both goods, Nation B can still choose to specialize in the production of one good in which it has comparative advantage.

trade deficit

- the amount by which the cost of a country's imports exceeds the value of its exports - Economic theory dictates that a trade deficit is not necessarily a bad situation because it often corrects itself over time

What are key economic arguments against free trade?

- the need to protect domestic industries - the necessity to shield infant industries the government needs to protect their local companies unless their domestic companies are good at exporting There are industries just starting in certain countries which makes it difficult to compete. One example is the automotive industry in Hungary- compared to Germany still considered an infant industry

How do tariffs affect international trade?

- they make foreign products more expensive, which means that consumers have to pay more - they limit or slow imports of certain goods to either protect national industries or decrease competition from the goods being imported. It decreases trade and slows economic business. For example if Japan imports one million cars into the USA then sales of USA Auto makers will decrease.

Is a large trade deficit a problem for a country, and if so why?

? ex: a deficit has been reported and growing in the United States for the past few decades, which has some economists worried. This means that large amounts of the U.S. dollar are being held by foreign nations, which may decide to sell at any time. A large increase in dollar sales can drive the value of the currency down, making it more costly to purchase imports

How do comparative advantages explain why companies from different countries trade?

Even if America has an absolute advantage over Europe in both cars and aircraft, as long as Europe is not equally less efficient in the production of both goods, Europe can still choose to specialize in the production of one good (such as cars) in which it has comparative advantage

Why do governments use non‐tariff barriers rather than tariffs?

Governments set non-tariff measures to address legitimate public policy concerns, and regulations on these measures. Non-tariff measures should be regulated because if they remain unbound, tariff commitments would be undermined as policymakers could simply use them more intensively once tariff bindings have been negotiated.

Why can government intervention in certain industries, at least theoretically, improve a countries trade position?

These industries have high up-front costs of entry, notably investments in research and in capability development and tend to be highly capital intensive, which creates high entry barriers. They have first-mover advantages

first-mover advantages

advantages that first entrants enjoy and do not share with late entrants

How do absolute advantages explain why companies from different countries trade?

by specializing in the production of goods for which each country has an absolute advantage, both countries can produce more and by trading, both can benefit more (international trade is not a zero-sum game as suggested by mercantilism, it is a win-win game).

Product life cycle

developed by Vernon, was the first dynamic theory to account for changes in the patterns of trade over time. Vernon divided the world into three categories: - lead innovation nation (which, according to him, is typically the- USA), - other developed nations- developing nations

oppurtunity cost

given the alternatives (opportunities), the cost of pursuing one activity at the expense of another activity

What is the central idea of mercantilism?

suggests that the wealth of the world (measured in gold and silver at that time) was fixed and that a nation that exported more and imported less would enjoy the net inflows of gold and silver and thus become richer

antidumping duties

to be considered dumping, it must meet 2 conditions: - must sell it below cost (China $10---> $8 in Hungary) - sell it below whole market price (if it costs $8 to manufacture and you sell it $10 in home market and at $9 in another country- it is considered dumping because it cannot be below your whole market price