5. Trading Internationally
§1. Why Do Nations Trade?
Trade means export (sell abroad) and import (buy from abroad). One can trade in
merchandise (goods) and services.
There must be economics gains from trade from both sides (otherwise it wouldn’t
exist).
The aggregation of importing and exporting by both sides leads to the country-
level balance of trade: whether a country has a trade surplus or deficit :
- Trade deficit a nation that imports more than it exports.
- Trade surplus a nation that exports more than it imports.
Why are there economics gains from international trade?
- Resource-based view: some firms in one nation generate exports that are
valuable, unique, and hard-to-imitate that firms from other nations
beneficial to import.
How do firms benefit from such gains?
- Institutional-based view: different rules governing trade are designed to
share such gains.
§2. Theories of International Trade
Summary/overview p. 163.
Classical trade theories of international trade that were advanced before the 20 th
century: mercantilism, absolute advantage, comparative advantage.
Theory of mercantilism believed that the wealth of the world was fixed. A
nation that exported more and imported less would become richer. Mercantilism
is the direct intellectual ancestor of modern-day protectionism, which is the idea
that governments should actively protect domestic industries from imports and
vigorously promote exports.
Theory of absolute advantage with free trade each
nation gains by specializing in economic activities in which
is has absolute advantage. Absolute advantage is the
economic advantage one nation enjoys that is absolutely
superior to other nations. The two greatest insights are:
- By specializing in the production of goods for which
each has an absolute advantage, both can produce
more.
- By trading, both can benefit more.
In this figure, China has an absolute advantage compared
to the USA in the production of wheat. The USA has an absolute advantage in the
production of aircrafts. This theory suggests that China should produce wheat
and USA should produce aircrafts.
Theory of comparative advantage focuses on the relative
(not absolute) advantage in one economic activity that one
nation enjoys in comparison with other nations. Opportunity
cost – cost of pursuing one activity at the expense of another
activity, given the alternatives (other opportunities) – is a
crucial concept. This theory focuses on productivity
differences between nations.
Where do absolute and comparative advantage come from?
The factor endowment theory proposed that nations will
develop comparative advantage based on their locally abundant factors (labor,
land, and technology).
Modern trade theories of international trade that were advanced after the 20 th
century: product life cycle, strategic trade, and national competitive advantage.
§1. Why Do Nations Trade?
Trade means export (sell abroad) and import (buy from abroad). One can trade in
merchandise (goods) and services.
There must be economics gains from trade from both sides (otherwise it wouldn’t
exist).
The aggregation of importing and exporting by both sides leads to the country-
level balance of trade: whether a country has a trade surplus or deficit :
- Trade deficit a nation that imports more than it exports.
- Trade surplus a nation that exports more than it imports.
Why are there economics gains from international trade?
- Resource-based view: some firms in one nation generate exports that are
valuable, unique, and hard-to-imitate that firms from other nations
beneficial to import.
How do firms benefit from such gains?
- Institutional-based view: different rules governing trade are designed to
share such gains.
§2. Theories of International Trade
Summary/overview p. 163.
Classical trade theories of international trade that were advanced before the 20 th
century: mercantilism, absolute advantage, comparative advantage.
Theory of mercantilism believed that the wealth of the world was fixed. A
nation that exported more and imported less would become richer. Mercantilism
is the direct intellectual ancestor of modern-day protectionism, which is the idea
that governments should actively protect domestic industries from imports and
vigorously promote exports.
Theory of absolute advantage with free trade each
nation gains by specializing in economic activities in which
is has absolute advantage. Absolute advantage is the
economic advantage one nation enjoys that is absolutely
superior to other nations. The two greatest insights are:
- By specializing in the production of goods for which
each has an absolute advantage, both can produce
more.
- By trading, both can benefit more.
In this figure, China has an absolute advantage compared
to the USA in the production of wheat. The USA has an absolute advantage in the
production of aircrafts. This theory suggests that China should produce wheat
and USA should produce aircrafts.
Theory of comparative advantage focuses on the relative
(not absolute) advantage in one economic activity that one
nation enjoys in comparison with other nations. Opportunity
cost – cost of pursuing one activity at the expense of another
activity, given the alternatives (other opportunities) – is a
crucial concept. This theory focuses on productivity
differences between nations.
Where do absolute and comparative advantage come from?
The factor endowment theory proposed that nations will
develop comparative advantage based on their locally abundant factors (labor,
land, and technology).
Modern trade theories of international trade that were advanced after the 20 th
century: product life cycle, strategic trade, and national competitive advantage.
