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Chapter Six

Trade & Investment Theory. Chapter Six. Feudalism. Pre-Industrial Revolution Little trade between countries Autarky: a self-sufficient and independent national economy. Mercantilism. Export goods for “specie” Restrict imports to maintain specie Build wealth. Absolute Advantage.

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Chapter Six

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  1. Trade & Investment Theory Chapter Six

  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

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