International Trade Models • Mercantilism; • The Classical Theories: – The Principle of Absolute Advantage – The Principle of Comparative Advantage • The Heckscher-Ohlin-Samuelson Model; • Alternative Trade Theories Mercantilism A school of thought dominant before the 19th century, which advocated restrictive trade policies, so as to maximize exports and minimize imports for the sake of accumulating gold and foreign exchange The Principle of Absolute Advantage “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the product of our own industry, employed in a way in which we have some advantage” Wealth of Nations, Adam Smith The Principle of Comparative Advantage “A nation, like a person, gains from trade by exporting the goods or services in which it has its greatest comparative advantage in productivity and importing those in which it has the least comparative advantage.” David Ricardo The Law of Comparative Advantage Mutually beneficial trade is possible whenever relative prices (opportunity costs) between two goods differ in two countries. The Gains From Trade A nation’s gains from The fact that a nation trade consists of two unequivocally gains components: from international • the gain from the trade does not mean reallocation of that all groups within consumption; and the nation necessarily • the gain from gain: in fact some specialization in groups will lose. production. Who Gains? • Producers and workers in the export industry gain as a result of higher world prices and a larger volume of trade; • Consumers of the import competing good gain as a result of lower world prices and a larger supply; and • Firms which use imported components and materials in their production process gain as a result of lower import prices. Who Loses? • Producers and workers in the import- competing industry lose due to increased competition from imports; • Consumers of the export good lose due to the smaller supply available to the local market and higher world prices; and • Firms which use exportable components and materials in their production process lose due to increased prices.
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