Theories of International Trade and Investment

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Theories of international trade and investment

Classical Theories (Why do nations trade?)

Mercantilism and Neomercantilism:
Mercantilism
- A belief popular in the 16th century that national prosperity results from maximizing exports and minimizing imports

Neomercantilism
- The idea that the nation should run a trade surplus
- Supporters includes:
Labor unions (who want to protect domestic jobs)
Farmers (who want to keep crop prices high)
Some manufacturers (that rely on exports)

Free trade
- The absence of restrictions to the flow of goods and services among nations
Leads to:
- More and better choices for consumers and firms
- Lower prices of goods for consumers and firms
- Higher profits and better worker wages (because imported input goods are usually cheaper)
- Higher living standards for consumers (because their costs are lower)
- Greater prosperity in poor countries

Absolute advantage principle
- A country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country
- i.e.
France could employ more of its resources to produce cloth
Germany could employ more of its resources to produce wheat
Labor cost in days of production for one ton:

One ton of:
France
30
40
Germany
100
20

Comparative Advantage Principle
- Country, location specfic
- The foundation concept of international trade that answers of how nations can achieve and sustain economic success and prosperity
- The superior features of a country that provide unique benefits in global competition
- Derived either form natural endowments or from deliberate national policies
- i.e.
France has a climate and soil superior for producing wine
Saudi Arabia has a natural abundance of oil for the production of petroleum products
Over time, Japan has acquired a superior base of knowledge…...

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