CHAP 6: International Trade and Factor-Mobility Theory

INTERVENTIONIST THEORY
Mercantilism holds that a country’s wealth is measured by its holdings of “treasure,”
which usually means its gold. -> Export more than import.
- Government policies: Gov restricted imports and subsidized noncompetitive
products to run a trade surplus.
- The concept of balance of trade:
+ Favorable balance of trade: Trade surplus >< deficit. Running a favorable
balance of trade does not necessarily mean beneficial.

Neomercantilism indicates that the government attempts to run a trade surplus to

achieve political/social objectives.

FREE-TRADE THEORY

Absolute advantage: different countries produce different things more efficiently

than others and that consumers should not have to buy domestically produced
goods when they can buy them more cheaply from abroad.
-> specialized in efficient production.
-> This advantage would be:
- Natural advantage: includes availability of workforce
- Acquired advantage: product technology (thành phẩm) or process
technology (quá trình)

Comparative advantage: global efficiency gains may still result from trade if a
country specializes in what it can produce most efficiently—regardless of other
countries’ absolute advantage.

Theory of specialization: Assumption and Limitations

- Full employment: In reality, workers does not fully concentrate on their job.
- Economic efficiency: Country’s goal may not be limited to economic
efficiency.
- Division of goals: unequal division of profit
- Transportation costs: if it costs more to transport than savings, the theories
doesn’t work
- Statics and dynamics
- Services: the theories deal with products rather than services
- Production networks: having different departments in different countries
- Mobility:
TRADE PATTERN THEORY
How much does a country trade?
Theory of country size:
- Big countries rely on trade less than small ones.
- Have higher transportation costs.
Size of the economy: big economies can produce more -> need to export more.

What types of products should a country trade?

-> Factor proportions theory: price relates to scarcity.
- People and land

With whom do countries trade?

Country-similarity theory -> primarily trade to similar country

THE STATIC AND DYNAMICS OF TRADE

PLC Theory: introduction -> Growth -> Maturity -> Decline
Not all products conform to the PLC theory, for example, pen

Why have countries developed and sustained different competitive advantages?

-> The diamond of national competitive advantage:
- Development
+ Demand condition
+ Factor conditions: factor constitute the product
+ Related and supporting industries: transportation, supporting services
- Sustainability
+ Firm strategy, structure and rivalry

FACTOR-MOBILITY THEORY
which focuses on why production factors move, the effects of that movement on
transforming factor endowments, and the impact of international factor mobility
(especially people) on world trade.

Why do production factors move?

 - Capital: is the most internationally mobile production factor, in a reaction to
changes in political and economic.
- People: less mobile than capital.
+ Economic motives: largely for higher income
+ Political motives:
-> Brain drain
THE RELATIONSHIP BETWEEN TRADE AND FACTOR MOBILITY

Substitution: Production factors follow factor proportions theory -> move to where
the resources is scarce.