Trade Theories, a Historical Approach
Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country. The economic arguments surrounding the benefits and costs of free trade in goods and services are not abstract academic ones. International trade theory has shaped the economic policy of many nations for the past 50 years.
The textbook reviews six main trade theories: Adam Smith's theory of absolute advantage; David Ricardo's theory of comparative advantage; the Heckscher-Ohlin theory and the product life-cycle theory, both of which extend various aspects of Ricardo's theory; the new trade theory explaining the benefits from trade without national differences in resource endowments or technology; and national competitive advantage theory drawing attention to an international success in a particular industry. All these theories identify the specific benefits of international trade, help to explain the patterns of international trade, and government trade policies.
Match the correct theory with its corresponding description and time period in the evolution of international trade theory.
1. Established in 1776, Adam Smith stated in this theory that
countries should specialize in the production of goods and services
for which they can produce most efficiently and then trade these
for goods produced by other countries.
(Click to select) Absolute advantage
theory New trade theory Heckscher-Ohlin
theory National competitive advantage
theory Comparative advantage theory Product
life-cycle theory
2. In 1817, David Ricardo stated that it makes sense for a
country to specialize in the production of those goods that it
produces most efficiently and to buy the goods that it produces
less efficiently from other countries.
(Click to select) Absolute advantage
theory New trade theory Heckscher-Ohlin
theory National competitive advantage
theory Comparative advantage theory Product
life-cycle theory
3. In the early 1900s, this theory predicts that countries will
export those goods that make intensive use of factors that are
locally abundant and import goods that make intensive use of
factors that are locally scarce.
(Click to select) Absolute advantage
theory New trade theory Heckscher-Ohlin
theory National competitive advantage
theory Comparative advantage theory Product
life-cycle theory
4. In the mid-1960s, a theory initially proposed by Raymond
Vernon, points out that where a new product is introduced is
important. Over time, cost considerations start playing a greater
role in the competitive process.
(Click to select) Absolute advantage
theory New trade theory Heckscher-Ohlin
theory National competitive advantage
theory Comparative advantage theory Product
life-cycle theory
5. Emerging in the 1970s, this theory states that through its
impact on economies of scale, trade can increase the variety of
goods available to consumers while decreasing the average cost of
those goods.
(Click to select) Absolute advantage
theory New trade theory Heckscher-Ohlin
theory National competitive advantage
theory Comparative advantage theory Product
life-cycle theory
6. The most current theory was developed by Michael Porter and
states that four broad attributes of a nation shape the environment
in which local firms compete, and these attributes promote or
impede the creation of competitive advantage.
(Click to select) Absolute advantage
theory New trade theory Heckscher-Ohlin
theory National competitive advantage
theory Comparative advantage theory Product
life-cycle theory
The following is the correct order of the theories proposed by different persons:
1 |
Absolute advantage theory 1776, Adam Smith, |
Countries should specialize in the production of goods and services for which they can produce most efficiently and then trade these for goods produced by other countries. |
2 |
Comparative advantage theory 1817, David Ricardo |
This theory predicts that countries will export those goods that make intensive use of factors that are locally abundant and import goods that make intensive use of factors that are locally scarce. |
3 |
Heckscher-Ohlin theory |
This theory predicts that countries will export those goods that make intensive use of factors that are locally abundant and import goods that make intensive use of factors that are locally scarce. |
4 |
Product life-cycle theory Mid-1960s, Raymond Vernon |
Points out that where a new product is introduced is important over time, cost considerations start playing a greater role in the competitive process. |
5 |
New trade Theory 1970s |
Emerging in the 1970s, this theory states that through its impact on economies of scale, trade can increase the variety of goods available to consumers while decreasing the average cost of those goods. |
6 |
National competitive advantage theory Michael Porter |
Michael Porter and states that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage developed the most current theory. |
Trade Theories, a Historical Approach Free trade refers to a situation where a government does not...
Read the overview below and complete the activities that follow. Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country. The economic arguments surrounding the benefits and costs of free trade in goods and services are not abstract academic ones. International trade theory has shaped the economic policy of many nations for the past 50...
One of the most controversial aspects of is that it supports government intervention and strategic trade policy. Multiple Choice O Heckscher-Ohlin theory O the theory of absolute advantage O O new trade theory O product life-cycle theory O O the theory of comparative advantage
Ricardo’s theory of trade suggests that it makes sense for a country to specialize in the production of those products that it produces most efficiently and to buy the products that it produces less efficiently from other countries, even if this means that the country is buying products that in reality, it could produce more efficiently itself. This means that Ricardo showed that a country can derive advantages by trade even though it has an absolute advantage in producing all products. The Heckscher-Ohlin theory of ...
Ricardo’s theory of trade suggests that it makes sense for a country to specialize in the production of those products that it produces most efficiently and to buy the products that it produces less efficiently from other countries, even if this means that the country is buying products that in reality, it could produce more efficiently itself. This means that Ricardo showed that a country can derive advantages by trade even though it has an absolute advantage in producing all products. The Heckscher-Ohlin theory of ...
The nation of Tazia exports agricultural products and in turn imports products that it does not produce such as computers and electronic devices. As a result, it spends more on imports than it gains from exports. Which perspective would frown on this form of international trade? Multiple Choice new trade theory product life-cycle theory mercantilism Heckscher-Ohlin theory theory of national competitive advantage
Which economic theory best explains current international trade and why? a) Mercantilism b) Absolute Advantage c) Comparative advantage d) Factors Proportions Theory e) International Product Life Cycle f) Porter's Theory of National Competitive
According to the _________, if a given country is innovative and a generator of new products, and it starts marketing such product in poorer foreign countries, and from there it starts to FDI in such country to seize location economies, it will ultimately end up no longer manufacturing its invention, but rather importing such product it once invented from such poorer country. Michael PorterÕs theory of competitive advantage of nations Smith's absolute advantage theory product life-cycle theory Ricardo's comparative advantage...
Which of the following is NOT one of the possible benefits for a country that participates in international trading? OA May bring in needed capital OB. Causes hyper-inflation OC. Creates jobs and raises wages OD. May bring in technology and skills Adam Smith believed that OA market forces should determine trade flows OB countries should produce most goods themselves and trade as little as possible O international trade should be restricted by tariffs and quotas OD governments should determine trade...
Using the framework in Table 6.1, explain which of the theories relate to Taiwan’s trade policy during each of the eras described in the case. A check mark indicates that a theory of trade concerns itself with the question asked at the head of the column; if there’s a dash, it doesn’t. In the last four columns, you can see how each theory responds to the specific question; again, a dash indicates that the theory does not address the question....
The different trade theories such as Heckscher-Ohlin- Samuelson, Rybczynski, Leontief, Baldwin, and Hicks emphasize factor intensity and reward/return to each factor and productivity. Using the Product Life Cycle as a point of reference, explain how these theories (at least 3) impacts developed or developing countries? NOTE: Agree or