finance and theories

Topics: International trade, Economics, International economics Pages: 36 (7424 words) Published: September 21, 2013
Part II Core Theory: Classic International Trade Theories

Table of Contents

Part II Core Theory: Classic International Trade Theories.........................2 1. Mercantilism ...........................................................................................2 The Classical World of David Ricardo and Comparative (Chapter 3) .......3 Advantage ...................................................................................................3 Absolute Advantage and Comparative Advantage .....................................5 Problems of Using Absolute Advantage to Guide Allocation of Tasks......8 Ricardian Comparative Advantage .............................................................9 Resource Constraints: ...............................................................................18 Complete Specialization: ..........................................................................20 Technological take over by less developed countries...............................21 Production Possibilities: ...........................................................................21 Complete versus Partial Specialization ....................................................23 The case of a small country ......................................................................24 Some concluding observations .................................................................25 2. Extensions and Tests of the Classical Model of Trade (chapter 4).......26 2.1 The classical model in money terms...................................................27 2.2 Changes in wages and exchange rates ................................................28 2.3 Multiple commodities .........................................................................30 -1-

Part II Core Theory: Classic International Trade Theories
1. Mercantilism and the Transition to Ricardo Theory of International Trade 2. Extensions and Tests of the Classical Model of Trade

1. Mercantilism
It is collection of economic thoughts that came into existence in Europe during 1500 to 1750. It can not be classified as a formal school of thought, rather a collection of similar attitudes toward economic thinking and international trade.

Central to mercantilist thinking was the view that national wealth was reflected not by its productive capacity, in a country’s holdings of precious metals. In addition, in this economic thinking, economic activity was regarded as zero sum game in which one country’s economic gain was at the expense of another. Acquisition of precious metals thus became the means for increasing wealth and well-being and the focus of the emerging Europe.

In general, mercantilists are in favor of excess exports over imports or favorable trade balance. The doctrine resulted from the view surplus was equivalent to wealth or accumulation of precious metals and can be used to finance the state needs for money (say military). Also a positive trade balance will increase the money supply which will reduce unemployment.

In terms of government policy, mercantilists argue that government should control the use and exchange of precious metals (bullionism). In particular, countries attempted to prohibit the export of gold, silver and other precious metals by individuals and let the specie leave the country only out of necessity.

Governments also gave exclusive rights for certain routes or areas to specific companies. Trade monopolies fostered the generation of higher profits through -2-

monopoly power. Profits would contribute to a positive trade balance and wealth of rulers (E.g. the Hudson Bay and Dutch East India Trading Company).

Governments controlled international trade activities with specific policies to maximize trade surplus. Exports were subsidized and high tariffs were placed on imports of consumption goods. Tariffs on imports of raw materials were kept low to support high value-added domestic manufacturing and exports.

Mercantilists also...
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