__________ advocates that countries should simultaneously encourage exports and discourage imports.

mercantilism Proposed in 1776, _________'s theory was the first to explain why unrestricted free trade is beneficial to a country. Smith Definition: The absence of government barriers to the free flow of goods and services between countries. free trade Smith argued that the ___________ ___________ of the market mechanism, rather than government policy, should determine what a country imports and what it exports. invisible hand A country's economy can gain through international trade because it allows a country to specialize in the manufacture and export of products that can be produced most ____________ in that country. efficiently The _____________ ____________-_____________ theory suggests that early in their life cycle, most new products are produced in and exported from the country in which they were developed. As a new product becomes widely accepted, production starts in other countries. product life-cycle Definition: Theory that sometimes countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms. new trade theory Michael Porter's theory of ___________ __________ ___________ explains that particular nations achieve international success in particular industries because of factors like domestic demand and domestic rivalry. national competitive advantage Definition: An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports. mercantilism Under a mercantilist policy, a country will __________ imports with tariffs and quotas, while simultaneously __________ exports. limit, subsidizing In 1752, David ________ pointed out the inconsistency in the mercantilist doctrine. Hume

A mercantilist policy would cause __________ in the home country, ultimately making foreign goods cheaper. inflation Definition: A situation in which an economic gain by one country results in an economic loss by another. zero-sum game True/False: Critics say that China is a neo-mercantilist nation because it deliberately keeps its currency low against the US dollar in order to sell more goods to the US. true In his book The Wealth of Nations, _________ _________ argues that countries differ in their ability to produce goods efficiently. Adam Smith

A country has an ___________ ___________ in the production of a product when i is more efficient than any other country in producing it. absolute advantage True/False: Adam Smith argues that under certain circumstances, a country should produce goods at home that it can buy at a lower cost from other countries. false Ghana's ____________ _____________ ____________ (PPF) shows the different combinations of products that it could produce. production possibility frontier Definition: A trade situation that produces net gains for all involved. positive-sum game

In his book Principles of Political Economy, _________ ________ shows that even if a country has an absolute advantage in every product it can produce, trading can still be beneficial. David Ricardo Ricardo's theory of ____________ ___________ suggests that it makes sense for a country to specialize in the production of those goods that it produces most efficiently, and to buy goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself. comparative advantage True/False: The theory of comparative advantage suggests that trade is a positive-sum game. true

One of the unrealistic assumptions of Ricardo's theory of comparative advantage is that the world only has ______ countries and ______ goods. two, two One of the unrealistic assumptions of Ricardo's theory of comparative advantage is that it assumes away ____________ costs between countries. transportation One of the unrealistic assumptions of Ricardo's theory of comparative advantage is that it assumes away differences in the __________ of resources in different countries. prices One of the unrealistic assumptions of Ricardo's theory of comparative advantage is that it does not account for __________ rates, and assumes that the products can be swapped on a one-to-one basis. exchange One of the unrealistic assumptions of Ricardo's theory of comparative advantage is that resources can move __________ from the production of one good to another within a country. freely One of the unrealistic assumptions of Ricardo's theory of comparative advantage is that there are constant returns to __________, and that specialization by either country has no effect on the amount of resources required to produce one unit of each product. scale One of the unrealistic assumptions of Ricardo's theory of comparative advantage is that each country has a ___________ stock of resources and that free trade does not change the ___________ with which a country uses its resources. fixed, efficiency One of the unrealistic assumptions of Ricardo's theory of comparative advantage is that it assumes away the effects of trade on ___________ distribution within a country. income

Definition: The units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier. constant returns to specialization Paul ____________'s critique of the theory of comparative advantage is that when a rich country enters into a free trade agreement with a poor country, the introduction of a free trade regime may not be enough to produce a net gain for the rich country if the effect of free trade is to lower real _________ rates in the rich country. Samuelson, wage In general, studies suggest that countries that adopt a _______ open stance toward international trade enjoy higher growth rates than those that don't. more The ______________-_____________ theory suggests that comparative advantage arises from differences in national factor endowments. Heckscher-Ohlin Definition: The extent to which a country is endowed with such resources as land, labor, and capital. factor endowments Unlike Ricardo's theory, the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in __________ _________ rather than differences in __________. factor endowments, productivity True/False: Most economists prefer Ricardo's theory over the Heckscher-Ohlin theory. false Wassily ___________ discovered that there was a great variance with the predictions of the HeckscherOhlin theory and the actual patterns of international trade. Leontief Which theory predicts trade patterns with greater accuracy: (a) Ricardo's or (b) the Heckscher-Ohlin theory? (Just type a or b for your answer.) a Once the impact of differences in ____________ is controlled for, the Heckscher-Ohlin theory seems to gain predictive power. technology Raymond ___________'s product life-cycle theory was based on the observation that for most of the 20th century, a large proportion of the world's new products had been developed by US firms. Vernon Vernon argued that the _________ and size of the US market gave US firms a strong incentive to develop new products. The cost of US _________ gave US firms an incentive to develop cost-saving process innovations. wealth, labor According to Vernon's theory, the locus of global production initially switches from the ____________ ___________ to other ____________ ___________ and then from those nations to ____________ ___________. United States, advanced nations, developing countries One weakness of the product life-cycle theory is that it can be seen as ____________, because not all new and major products have been introduced in the United States. ethnocentric Definition: Cost advantages associated with large-scale production. economies of scale

There are two important points to the new trade theory: (1) Through its impact on economies of scale, trade can increase the ___________ of goods available to consumers and decrease the average ___________ of those goods. (2) In those industries where the output required to attain economies of scale represents a significant proportion of total world demand, the global market may be able to support a _________ number of enterprises. variety, costs, small Definition: Advantages accruing tot he first to enter a market. first-mover advantage

True/False: The new trade theory suggests that nations will not benefit from trade when they do not differ in resource endowments or technology. false The new trade theory differs from the Heckscher-Ohlin theory in that it suggests that a country will dominate the export of a product because it is one of the first __________ in the industry, not because of ____________ __________. movers, factor endowments True/False: The new trade theory is useful in explaining trade patterns. true In 1990, Michael _________ researched to find four main attributes of nations that explain why some nations succeed and others fail at international competition. Porter Porter's four attributes that promote or impede the creation of competitive advantage are: (1) ___________ endowments, (2) ___________ conditions, (3) relating and supporting __________, and (4) ____________ strategy, structure, and rivalry. factor, demand, industries, firm Porter's first attribute of competitive advantage, ___________ __________, describes a nation's position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry. factor endowments Porter's second attribute of competitive advantage, ___________ __________, describes the nature of home demand for the industry's product or service. demand conditions Porter's third attribute of competitive advantage, ___________ and __________ industries, describes the presence or absence of supplier industries and related industries that are internationally competitive. relating, supporting Porter's first attribute of competitive advantage, firm ___________, ____________, and __________, describes the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry. strategy, structure, rivalry Porter calls his four attributes of competitive advantage the ___________. diamond

True/False: Porter's diamond is a mutually reinforcing system, in that the effect of one attribute is contingent on the state of the others. true What are the two additional variables that can influence Porter's national diamond? government chance,

Porter recognizes hierarchies among factors, distinguishing between __________ and __________ factors. basic, advanced Porter argues that __________ factors are the most significant for competitive advantage. advanced Porter's attribute of demand conditions supports that firms are typically most sensitive to the needs of their ___________ customers. closest The two points of Porter's attribute of firm strategy, structure, and rivalry are that (1) different nations are characterized by different ___________ ideologies, and (2) there is a strong association between vigorous __________ rivalry and the creation and persistence of competitive advantage in an industry. management, domestic True/False: Porter's theory has not been subjected to detailed empirical testing. true __________-__________-___________ accounts are national accounts that track both payments to and receipts from foreigners. balance-of-payments Definition: In the balance of payments, records transactions involving the export or import of goods and services. current account Definition: Occurs when a country imports more goods, services, and income than it exports. account deficit Definition: Occurs when a country exports more goods, services, and income than it imports. account surplus Definition: Records onetime changes in the stock of assets. capital account financial account current

current

Definition: Records transactions that involve the purchase or sale of assets.