factor and imports goods that make intensive use of the country’s scarce factor. 6. The Leontief Paradox : Leontief’s paradox in economics is that the country with the world’s highest capital-per worker has a lower capital/labor ratio in exports than in imports. This econometric find was the result of Professor Wassily W. Leontief’s attempt to test the Heckscher-Ohlin theory empirically. In 1954‚ Leontief found that the U.S. (the most capital-abundant country in the world) exported labor-intensive
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Advantage (Adam Smith 1776) Explains why unrestricted free trade is beneficial to a Country. 3. Comparative Advantage (David Ricardo 1817) Efficiency of production. 4. Heckscher–Ohlin Theory (Eli Heckscher 1919 & Bertil Ohlin 1933) The Leontief Paradox (Wassily Leontief 1953) Mercantilism Initial trade theory that formed the foundation of economic thought from 1500 – 1800 Based on concept that a nations wealth is measured by its holding of treasure (gold) Nations often imposed restrictions
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Week 2 (7) Trade and Comparative Advantage Chapter 3 Problem set Exercise 2.1 Assume there are just two countries in the world‚ i.e. the European Union (EU) and the Rest of the World (RW). Both countries produce and consume 2 products: bicycles (b) and apples (a). Per bike‚ the EU puts in 3 hours of labour while the RW puts in 5. Per ton of apples‚ the EU needs 2 hours v. the RW 1 hour of labour. A further given is that the EU has 2400 hours of labour available v. RW 1600. The world
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Chapter 2 International Trade and Foreign Direct Investment True/False Questions 1. The classical international trade theories are from the perspective of a country. True; Easy 2. Trade surplus refers to a situation where the value of imports is greater than the value of exports. False; Easy 3. The economic theory of mercantilism stated that a country’s wealth was determined by the amount of its gold and silver holdings. True; Easy 4. Trade deficit refers to a situation
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CHAPTER 5: INTERNATIONAL TRADE THEORY QUICKNOTES IN GLOBAL INTERNATIONAL TRADE Condensed by: Group 2 7 THEORIES OF INTERNATIONAL TRADE: 1. Mercantilism 2. Absolute Advantage 3. Comparative Advantage 4. Heckscher-Ohlin Theory 5. Product Life-Cycle Theory 6. New Trade Theory 7. The Theory of National Competitive Advantage 1. Mercantilism -emerged in England in the mid-16th century. The main tenet of mercantilism was that it was in a country’s best interests
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Chapter 5 Student: ___________________________________________________________________________ 1. The success of the rose industry in Ecuador is a good example of the economic benefits of what? A. Free trade B. Restrictive government regulations C. New tax rules D. Technological advancements E. Firm rivalry 2. Propagated in the 16th and 17th centuries‚ __________ advocated that countries should simultaneously encourage exports and discourage imports. A. ethnocentrism B. capitalism C. collectivism
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Overview trade theories International Economics Classical trade theories Explanation Absolute advantage theory (Smith) * When one nation is more efficient than another in the production of one commodity but is less efficient than the other nation in producing a second commodity‚ then both nations can gain by each specializing in the production of the commodity of its absolute advantage (most efficient commodity) and exchanging part of its output with the other nation for the commodity of
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Mercantilism…………………………………………………………………….....6 V. Absolute Advantage……………………………………………………………......8 VI. Comparative Advantage………………………………………………………........8 a. Qualification and Assumption VII. Hecksher-Ohlin Theory…………………………………………………………..11 a. The Leontief Paradox……………………………………………………..11 VIII. Country Similarity Theory IX. The Product Life- Cycle Theory X. Global Statistic Rival Theory XI. Porter’s Theory of national Competitive Advantage a. Porter’s Diamond b. Evaluating Porter’s Theory XII
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preferred to the Ricardo theory by many economists‚ because it makes fewer simplifying assumptions. In 1953‚ Wassily Leontief published a study‚ where he tested the validity of the Heckscher-Ohlin theory. The study showed that the U.S was more abundant in capital compared to other countries‚ therefore the U.S would export capital- intensive goods and import labour-intensive goods. Leontief found out that the U.S’s export was less capital intensive than import. Limitations of Heckscher Ohlin Theory Criticised:
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International Trade Theories Mercantilism Mercantilism was a sixteenth-century economic philosophy that maintained that a country’s wealth was measured by its holdings of gold and silver (Mahoney‚ Trigg‚ Griffin‚ & Pustay‚ 1998). This recquired the countries to maximise the difference between its exports and imports by promoting exports and discouraging imports. The logic was transparent to sixteenth-century policy makers-if foreigners buy more goods from you than you buy from them‚ then the foreigners
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