Chapter Six

1
Chapter Six

• Trade Investment Theory

2
Feudalism

• Pre-Industrial Revolution
• Little trade between countries
• Autarky a self-sufficient and independent
  national economy

3
Mercantilism

• Export goods for specie
• Restrict imports to maintain specie
• Build wealth

4
Absolute Advantage

• Adam Smith
• 1776 The Wealth of Nations
• Focus on countries
• Attacked mercantilism
• Absolute advantage What can Country A make most
  cheaply?
• Division of labor

5
Comparative Advantage

• David Ricardo
• 1819
• Focus on countries
• What can Country A make more cheaply versus
  Country B?
• Increase in total consumption and wealth

6
Factor Proportions

• Eli Heckscher/Bertil Ohlin
• 20th Century
• Factors labor capital
• Produce what you have
• Factor intensities

7
Leontief Paradox

• Wassily Leontief
• 1950
• Discovered flaw in trade theory
• Created input-output analysis
• Applied to US exports and imports
• Exports were more labor intensive than imports
• Solution? Maybe different levels of labor
  skilled and unskilled

8
Overlapping Product Ranges

• Staffan Burenstam Linder
• 1970s
• Similarly situated countries trade
• Demand, not cost, is key to trade
• Keys
• Demand for complex products increases with wealth
• Business starts at home, then goes abroad
• Countries with similar income levels trade

9
Product Cycle Theory

• Raymond Vernon
• 1966
• Added to Factor Properties Theory
• Technology is driver
• Stage One The New Product
• Stage Two The Maturing Product
• Stage Three The Standardized Product

10
Imperfect Market Theory/Economies of Scale

• Paul Krugman
• 1980s
• Economies of Scale
• Internal Company lowers per unit price by
  increasing volume of production
• External Country (or area) decreases cost by
  increasing size of industry

11
Competitive Advantage

• Michael Porter (Harvard)
• Re-focus on nations
• Innovation is key
• Competition forces innovation
• Diamond of National Advantage
• Factor conditions
• Demand conditions
• Related and supporting industries
• Firm strategy, structure, and rivalry