Chapter 5 – Trading Across Borders
Trade is exporting and importing
Exporting is selling abroad
Importing is buying from abroad
Merchandise are tangible products being traded
Services are intangible services being traded
International trade is a win-win deal
Trade deficit is an economic condition in which a nation imports more than it
exports
Trade surplus is an economic condition in which a nation exports more than
it imports
Balance of trade is the aggregation of importing and exporting that leads to
the country-level trade surplus or deficit
According to the resource-based view, there are economic gains from
international trade because some firms in one nation generate exports that
are valuable, unique, and hard-to-imitate that firms from other nations find it
beneficial to import
According to the institution-based view, different laws and regulations
governing trade aim to share gains from trade
Classical trade theories are the major theories of international trade that
were advanced before the 20th century, which consist of
o Mercantilism
Export more, import less = rich
Reduces the wealth of a nation in the long run
o Absolute advantage
o Comparative advantage
Modern trade theories of international trade that were advanced in the 20 th
century, which consist of
o Product life cycle
o Strategic trade
o National competitive advantage of industries / diamond
Theory of mercantilism is a theory that suggests that the wealth of the world
is fixed and that a nation that exports more and imports less will be richer
Protectionism is the idea that governments should actively protect domestic
industries from imports and vigorously promote exports
Free trade is the idea that free market forces should determine how much to
trade with little or no government intervention
Theory of absolute advantage is a theory that suggests that under free trade,
a nation gains by specializing in economic activities in which it has an
absolute advantage
Absolute advantage is the economic advantage one nation enjoys that is
absolutely superior to other nations
Theory of comparative advantage is a theory that focuses on the relative (not
absolute) advantage in one economic activity that one nation enjoys in
comparison with other nations
Trade is exporting and importing
Exporting is selling abroad
Importing is buying from abroad
Merchandise are tangible products being traded
Services are intangible services being traded
International trade is a win-win deal
Trade deficit is an economic condition in which a nation imports more than it
exports
Trade surplus is an economic condition in which a nation exports more than
it imports
Balance of trade is the aggregation of importing and exporting that leads to
the country-level trade surplus or deficit
According to the resource-based view, there are economic gains from
international trade because some firms in one nation generate exports that
are valuable, unique, and hard-to-imitate that firms from other nations find it
beneficial to import
According to the institution-based view, different laws and regulations
governing trade aim to share gains from trade
Classical trade theories are the major theories of international trade that
were advanced before the 20th century, which consist of
o Mercantilism
Export more, import less = rich
Reduces the wealth of a nation in the long run
o Absolute advantage
o Comparative advantage
Modern trade theories of international trade that were advanced in the 20 th
century, which consist of
o Product life cycle
o Strategic trade
o National competitive advantage of industries / diamond
Theory of mercantilism is a theory that suggests that the wealth of the world
is fixed and that a nation that exports more and imports less will be richer
Protectionism is the idea that governments should actively protect domestic
industries from imports and vigorously promote exports
Free trade is the idea that free market forces should determine how much to
trade with little or no government intervention
Theory of absolute advantage is a theory that suggests that under free trade,
a nation gains by specializing in economic activities in which it has an
absolute advantage
Absolute advantage is the economic advantage one nation enjoys that is
absolutely superior to other nations
Theory of comparative advantage is a theory that focuses on the relative (not
absolute) advantage in one economic activity that one nation enjoys in
comparison with other nations
