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Theories of Trade 2019
Theories of Trade 2019
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
International
Trade Theory
Introduction
5-3
An Overview of Trade Theory
5-4
An Overview of Trade Theory
5-5
The Benefits of Trade
5-6
The Pattern of
International Trade
5-7
The Pattern of
International Trade
5-8
The Pattern of
International Trade
5-9
Trade Theory
and Government Policy
5-10
Mercantilism
5-11
Absolute Advantage
5-12
Absolute Advantage
5-13
Absolute Advantage
5-14
Absolute Advantage
○ Without trade
○ Ghana would produce 10 tons of cocoa and
5 tons of rice
○ South Korea would produce 10 tons of rice
and 2.5 tons of cocoa
5-15
Absolute Advantage
○ Suppose
○ Ghana could trade 6 tons of cocoa to South
Korea for 6 tons of rice
○ After trade
○ Ghana would have 14 tons of cocoa left, and
6 tons of rice
○ South Korea would have 14 tons of rice left
and 6 tons of cocoa
5-16
Absolute Advantage
5-17
Absolute Advantage
5-18
Comparative Advantage
5-19
Comparative Advantage
○ Assume
○ Ghana is more efficient in the
production of both cocoa and rice
○ In Ghana, it takes 10 resources to
produce one tone of cocoa, and 13 1/3
resources to produce one ton of rice
○ So, Ghana could produce 20 tons of
cocoa and no rice, 15 tons of rice and
no cocoa, or some combination of the
two
5-20
Comparative Advantage
○ With trade
○ Ghana could export 4 tons of cocoa to
South Korea in exchange for 4 tons of
rice
○ Ghana will still have 11 tons of cocoa,
and 4 additional tons of rice
○ South Korea still has 6 tons of rice and
4 tons of cocoa
5-22
Comparative Advantage
5-23
Classroom Performance System
5-24
The Gains from Trade
5-25
Qualifications and Assumptions
5-26
Extensions of
the Ricardian Model
5-27
Extensions of
the Ricardian Model
1. Immobile Resources
○ Resources do not always move freely from one
economic activity to another
○ Governments may help retrain displaced
workers
2. Diminishing Returns
○ The simple model assumes constant returns to
specialization (the units of resources required to
produce a good are assumed to remain
constant), but an assumption of diminishing
returns is more realistic since not all resources
are of the same quality and different goods use
resources in different proportions
5-28
Extensions of
the Ricardian Model
5-29
Extensions of
the Ricardian Model
5-30
Extensions of
the Ricardian Model
5-31
Heckscher-Ohlin Theory
5-32
The Leontief Paradox
5-34
The Product Life Cycle Theory
5-35
The Product Life Cycle Theory
5-37
The Product Life Cycle Theory
5-38
The Product Life Cycle Theory
The Product Life Cycle
5-39
Evaluating The
Product Life Cycle Theory
5-41
Increasing Product Variety
and Reducing Costs
○ Without trade
○ a small nation may not be able to support the
demand necessary for producers to realize
required economies of scale, and so certain
products may not be produced
○ With trade
○ a nation may be able to specialize in
producing a narrower range of products and
then buy the goods that it does not make
from other countries
○ each nation then simultaneously increases
the variety of goods available to its
consumers and lowers the costs of those
goods
5-42
Economies of Scale, First Mover
Advantages and the Pattern of Trade
5-43
Implications of New Trade Theory
5-44
National Competitive Advantage:
Porter’s Diamond
5-45
National Competitive Advantage:
Porter’s Diamond
5-46
Factor Endowments
5-48
Related and Supporting
Industries
5-49
Classroom Performance System
5-50
Firm Strategy, Structure, and Rivalry
5-51
Evaluating Porter’s Theory
5-52
Evaluating Porter’s Theory
5-53
Implications for Managers
5-55
First-Mover Advantages
5-56
Government Policy
5-57
Classroom Performance System
5-58
Critical Discussion Question
5-59
Critical Discussion Question
5-60
Critical Discussion Question
5-61
Critical Discussion Question
5-62
Critical Discussion Question
5-63
Critical Discussion Question
5-64
Critical Discussion Question
5-65