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Chapter 2

Chapter 2. Trade Theories and Economic Development. 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. Chapter Outline.

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Chapter 2

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  1. Chapter 2 Trade Theories and Economic Development

  2. 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

  3. 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

  4. 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

  5. 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)

  6. 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

  7. 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

  8. 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

  9. Levels of Economic Cooperation • Free Trade Area • Customs Union • Common Market • Economic and Political Union • Political Union

  10. 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

  11. Economic Cooperation • Economic and Monetary Union - common market - + harmonization of national economic policies - + one money • Political Union - harmonization of national political policies

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