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Mercantilism
± Mercantilism is a sixteenth-century
economic philosophy that maintains that a
country¶s wealth is measured by its
holdings of gold and silver. According to
mercantilists, a country¶s goal should be to
enlarge those holdings.
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Absolute advantage
± Adam Smith argued that mercantilism robs
individuals of the ability to trade freely and to
benefit from voluntary exchanges. Smith
developed the theory of absolute advantage,
which suggests that a country should export those
goods and services for which it is more productive
than other countries and import those goods and
services for which other countries are more
productive than it is.
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Comparative advantage
± David Ricardo, an early nineteenth-century
British economist, refined the theory of
absolute advantage by developing the
theory of comparative advantage. This
theory states that a country should produce
and export those goods and services for
which it is relatively more productive than
are other countries and import those goods
and services for which other countries are
relatively more productive than it is.
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Another source of firm-specific
advantages in international trade is
exploitation of the experience curve. For
certain types of products, production
costs decline as the firm gains more
experience in manufacturing the
product. Experience curves may be so
significant that they govern global
competition within an industry.
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Demand factors
± Customer access
± Marketing advantages
± Exploitation of competitive advantages
± Customer mobility
Political factors
± Avoidance of trade barriers
± Economic development incentives
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