1.1 THEORIS OF INTERNATIONAL TRADE
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for International Trade Finance — International Trade Finance.
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What is the core premise of the Theory of Absolute Advantage proposed by Adam Smith?
Adam Smith argued that a country should export goods it can produce more efficiently (at lower absolute cost) than other countries and import goods others produce more efficiently, thereby benefiting all trading nations.
What is the concept of 'opportunity cost' in the context of comparative advantage?
The cost of foregone alternative production when specialising in one good.
How does David Ricardo's Theory of Comparative Advantage differ from Adam Smith's Absolute Advantage?
Ricardo showed that even if one country is absolutely more efficient in producing all goods, mutually beneficial trade can still occur if each country specialises in goods where its relative (comparative) cost advantage is greatest.
What is the concept of 'autarky' in international trade theory?
A self-sufficient economy that does not engage in international trade.
What does the Heckscher-Ohlin (H-O) Theory of international trade state?
The H-O theory states that a country will export commodities that use its abundant factor of production intensively and import commodities that use its scarce factor intensively, linking trade patterns to factor endowments.
What does the 'factor endowment' refer to in the Heckscher-Ohlin framework?
Relative abundance of labour, capital, and natural resources a country possesses.
What is the Leontief Paradox and why is it significant in trade theory?
Wassily Leontief found empirically that the USA, a capital-abundant country, exported labour-intensive goods and imported capital-intensive goods, contradicting the H-O theorem and stimulating further refinements in trade theory.
What is meant by 'trade creation' in the context of regional trade agreements?
Trade shift from high-cost domestic production to lower-cost partner imports.
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