TAILIEUCHUNG - Lecture Global business today (8/e): Chapter 6 - Charles W.L. Hill

Chapter 6 - International trade theory. In this chapter students will be able to: Understand why nations trade with each other, summarize the different theories explaining trade flows between nations, recognize why many economists believe that unrestricted free trade between nations will raise the economic welfare of countries that participate in a free trade system, | Global Business Today 8e by Charles . Hill Chapter 6 International Trade Theory Introduction International trade theory: Explains why it is beneficial for countries to engage in international trade Helps countries formulate their economic policy Explains the pattern of international trade in the world economy An Overview of Trade Theory Question: What is free trade? 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 An Overview of Trade Theory Question: Why is free trade beneficial for countries? International trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, and import products that can be produced more efficiently in other countries International trade is beneficial even in products a country is able to produce for itself While trade theories all suggest that trade is beneficial, they lack agreement in their recommendations for government policy Mercantilism Mercantilism (mid-16th century) - it is in a country’s best interest to maintain a trade surplus - to export more than it imports Advocated government intervention to achieve a surplus in the balance of trade Viewed trade as a zero-sum game - one in which a gain by one country results in a loss by another Mercantilism is problematic and not economically valid, yet many political views today have the goal of boosting exports while limiting imports by seeking only selective liberalization of trade Absolute Advantage Smith (1776) - countries differ in their ability to produce goods efficiently A country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it According to Smith: Trade is not a zero-sum game Countries should specialize in the production of goods for which they have an absolute advantage and .

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