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Theories of International Trade and Investment - Coggle Diagram
Theories of International Trade and Investment
International Trade in General and its Importance
Exchange of goods and services between people, organizations, and countries.
For as long as countries and businesses have existed, international trade has been a vital means of the countries’ and businesses’ economies.
Links nations together
Has grown in the last five decades, and it is freer now than ever
Mercantilism
Economic and cultural philosophy of the sixteenth and seventeenth centuries, reflecting the emergence of economies based on commerce
Attached great importance to the attainment of a net inflow of precious metals and imports were discouraged by duties
Government should establish economic policies that promoted exports and discouraged imports, so that the trade surplus created should be paid for in gold and silver
"Economic state building"
Adam Smith and the Theory of Absolute Advantage
A country can produce some goods more efficiently than other countries
A country’s advantage would be either natural (climate and natural resources) or acquired (technology and skills) in the production of goods
Each country would specialize in a product for which it was uniquely suited
David Ricardo and the Theory of Comparative Advantage
Law of comparative costs
Based on what was given up or traded off in producing one product instead of the other
Important part of the theory of international trade today
The Heckscher–Ohlin (Factor Proportions) Model
developed in the nineteenth century
labor and capital are used in the production of two final goods
capital refers to the physical machines and equipment that is used in production
capital must be owned by someone
Individuals or gov
the only difference between countries is found in the relative endowments of factors of production
capital-abundant country exports capital-intensive goods
labor-abundant country exports labor-intensive goods
Raymond Vernon and the Product Life Cycle Theory of Trade
emphasis on information, uncertainty, and scale economies rather than comparative cost
Studies the whole life cycle of high-income or labor-saving products through this point of view:
the invention of a new product, the maturing product, and the standardized product, each stage implying a different type of trade
The product life cycle concept identifies four stages that the trade patterns go through
IPLC market life span stages the product goes through in international markets
introduction, growth, maturity, decline, and extinction
The product cycle is a macro-level attempt to generalize patterns of trade between nations based on empirical data
Contemporary Trade Theories
Porter’s Diamond of National Advantage
A nation attains a competitive advantage if its firms are competitive
Firms become competitive through innovation to the product or to the production process.
Factor conditions
Demand conditions
Related and supporting industries
Firm strategy, structure, and rivalry