Trade theory helps managers and government polciymakers focus on the questions:

1) What products should we import and export?

2) How much should we trade?

3) With whom should we trade?

Mercantilist Theory

&

Balance of Trade Concept

(Trade Surplus/Deficit)

Mercantilist Theory - a trade theory holding that a country's wealth is measured by its holding of "treasure," which usually means its gold.

Trade Surplus - country is exporting more than its importing. (Favorable)

Trade Deficit - country is importing more than its exporting. (Unfavorable)

• When the factor proportions vary widely among countries, pressures exist for the most abundant factos to move to countries w/ greater scarcity--where they can command a greater return.
• Although international mobility of production factos may be a substitute for trade, the mobility may stimulat etrade through sales of components, equipment, and complementary products.

Absolute Advantage

vs.

Comparative Advantage

#1

The Theory of Absolute Advantage - holds that different countries produce some goods more efficiently than others and questions why the citizens of any country should have to buy domestically produced goods when they can buy them more cheaply from abroad?

Absolute Advantage

vs. 

Comparative Advantage

#2

The Theory of Comparative Advantage - theory says that global efficiency gains may still result from trade if a country specializes in those products it can produce more efficiently that other products--regardless of whether other countries can produce those same products more efficiently or not.

Absolute Advantage

vs.

Comparative Advantage

#3

Absolute VS.:

• Suggests specialization through free tradew b/c consumers will be better off buying foreign made products more cheaply.
• If trade were unrestricted, each country would specialize in those products that gain it a competitive advantage.

Absolute Advantage

vs. 

Comparative Advantage

#4

VS. Comparative:

• Also proposes specialization through free trade based on the belief that total global output can increase even if one country has an absolute advantage in the production of all products.
• Gains from trade will over b/c the country gives up less efficient output to produce more efficient output.

• Capital and labor