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Chapter Seven: Governmental Influence On Trade Dr. Mayur Shah
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Chapter Objectives
To understand theories of international trade To explain how global efficiency can be improved through free trade To identify factors affecting national trade patterns To explain why a countrys export capabilities are dynamic To understand why production factors To explain the relationship between foreign trade and international factor mobility To explain the rationales for governmental policies that enhance and restrict trade To show the effects of pressure groups on trade policies To describe the potential and actual effects of governmental intervention on the free flow of trade To illustrate the major means by which trade is restricted and regulated To demonstrate the business uncertainties and business opportunities created by governmental trade policies
Free-trade theories:
Absolute advantage Comparative advantage
Trade competitiveness:
Product life cycle theory Porter diamond
Mercantilist Theory
Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective
Theories of Specialization
Both absolute and comparative advantage theories are based on specialization Assumptions policymakers question:
full employment economic efficiency division of gains transport costs statics and dynamics services production networks mobility
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Factor-Proportions Theory
A countrys relative endowments of land, labor, and capital will determine the relative costs of these factors Factor costs will determine which goods the country can produce most efficiently
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Country-similarity Theory
Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them
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Chapter 7
Government restrictions through trade policies protectionism on foreign trade are known as
Government take measures to restrict (or enhance) international trade which will invariably affect the companies capacity to compete on an international scale
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Physical and Social Factors Affecting the Flow of Goods and Services
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Protecting Infant-Industries
The infant-industry argument for protection holds that governmental prevention of import competition is necessary to help certain industries move from high-cost to low-cost production
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