International Trade Theory

Why nations trade with each other?
1. Exchange of products that a country can produce at low cost for some product that cannot product at all.
2. Consumer in all nations can consume more
3. Increase variety of goods available to consumers and decrease the average cost
4. The size of market expand
5. Access to more products
Trade theories and trade flows between nations
1. Mercantilism
  1. Country best interest to mantain a trade sulpus, to export more than it imported
  2. Zero-sum Game: gain by one country result in loss by another
  3. China
2. Absolute advantage
  1. Adam Smith
  2. A country has absolute advantage in the production of a product when it is more efficient than any other country
  3. Specialize in the production of goods for which have absolute advantage
  4. Do not prouduce goods that can buy at lower cost from other countries
3. Comparative advantage
  1. David Ricardo
  2. International differences in labor productivity
  3. Ricardian Model
4. Comparative advantage
  1. Michael Porter
  2. Porter´s Diamond
    1. Factor endowments
    2. Demand conditions
    3. Related and supporting indutries
    4. Firms strategy, structure and rivality
  3. Degree to which a nation is likely to achive international success
5. New trade theory
  1. World market can only support a limited number of firms
    1. Firms that enter the market first have competitive advantage
6. Heckscher-Ohlin theory
  1. comparative advantage arise from differences in national factor endowments
    1. Different factors edowments expain differences in factor cost
  2. Export locally abundant goods Import locally scarce goods
7. Product life-cycle theory
  1. Raymon Veron
  2. New products are produced in and exporter from the country in which they were developed
    1. Start demand in other countries and import from the country where the product was originated
      1. Demand grow in other countries and they start producing the product
        The country where the product began lose advantage
Importance of implications of international theories in business
1. Location
  1. To know where to invest (firms of countries that perform most efficiently
  2. Find competitive advantage
  3. To know where facilities should be located
2. First-mover advantage
  1. To know if it is convinient to invest in an specific industry
3. Government policy
  1. Trade restictions, tariffs
Does the unresticted trade between nations will raise the economic welfare of countries?
1. Trade is a positive-sum game in which all countries that participate realize economic gain
2. Jeffrey Sach and Andrew Warner
  1. Open economies gre at 4.49% per year Closed economies grew .69% per year
3. Wacxiarg and Welch
  1. countries with open economies increases in their anual growth rates of 1.5%
4. Biggest economies have free markets
5. Jeffrey Frankel and David Romer
  1. 1% point increase in the ratio of a country´s trade to its GDP income per person by at least .5%
Arguments that mantein that goverment controls some indistries
1. Can shape domestic demand through local product standars
2. Establish regulations that influence buyers needs
3. Can support industries through regulations
4. Influence firms rivality
5. Establish customs and taxes

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International Trade Theory

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