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Chapter Six
International Trade and Factor Mobility Theory
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Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall
Chapter Objectives
To understand theories of international trade To explain how free trade improves global efficiency To identify factors affecting national trade patterns To explain why a countrys export capabilities are dynamic To understand why production factors, especially labor and capital, move internationally To explain the relationship between foreign trade and international factor mobility
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Trade Theory
Helps managers and government policymakers focus on these questions: What products should we import and export? How much should we trade? With whom should we trade?
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Interventionist Theories
MERCANTALISM Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) Countrys wealth is measured by its holding of treasure (gold) Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective 6-7
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COMPARATIVE ADVANTAGE
Also proposes specialization through free trade based on the belief that total global output can increase even if one country has an absolute advantage in the production of all products
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Theories of Specialization
Both absolute and comparative advantage theories are based on specialization Assumptions policymakers question:
full employment economic efficiency division of gains two countries, two commodities transport costs statics and dynamics services production networks mobility
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Factor-Proportions Theory
By Eli Heckscher and Berthil Ohlin A countrys relative endowments (land, labor, and capital) will determine the relative costs of these factors Factor costs will determine which goods the country can produce most efficiently Eg: - If labor abundant compared to land & capital, labor cost would be low! - If scarce cost would be high! Therefore, country will EXPORT product that used their abundant factor & IMPORT product that used scarce factor. 6-12
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Country-Similarity Theory
Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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