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Theories of International Trade and International Investment - Coggle…
Theories of International Trade and International Investment
International Trade in General and its Importance
International trade, which is the exchange of goods and services between people, organizations, and countries.
This exchange takes place because of differences in the costs of production between countries and because it increases the economic welfare of each country.
By widening the range of goods and services available for consumption.
Mercantilism
Mercantilism is an economic and cultural philosophy of the sixteenth and seventeenth centuries, reflecting the emergence of economies based on commerce.
Mercantilism, or “economic state building,” commonly involved extensive governmental intervention in economic life with the objective of fostering the growth of national commerce and industry.
Tax exemptions, loans, subsidies, and other forms of state aid encouraged newly established industries, and elaborate regulative schemes were instituted.
To control their development and assure the quality of their products.
Adam Smith and the Theory of Absolute
Advantage
Labor was the fundamental measure of value, though actual prices of commodities were determined by supply and demand on the market.
If it cost twice the labor to kill a beaver as it does to kill a deer, one beaver would exchange for two deer.
There were two elements in the problem of increasing wealth:
(a) the skill of the labor force and
(b) the proportion of productive to unproductive labor.
David Ricardo and the Theory of Comparative Advantage
David Ricardo took the logic of absolute advantage in production one step further to explain how countries could exploit their own advantages and gain from international trade.
If profits were higher at one place than at another, it would encourage capital to be invested at the place of high return.
Until by the process of diminishing returns, profit fell into line with profits elsewhere. Therefore,