International Business Notes

Chapter 5

* Mercantilism * Doctrine from England that advocated that countries should simultaneously encourage exports and discourage imports. Country should maintain trade surplus by exporting more than importing. To achieve this imports were limited with tariffs and quotas. * Economist David Hume explains that in the long run no country could sustain a surplus on the balance of trade as the merchant had envisaged. * EX: more exporting (England) than importing (France) results in inflation for England due to the swelling of all the money in the domestic market. In France money would contract, it would result in its prices falling. In result, the French would import less from England because of them becoming expensive and England would want more from the French because they were becoming cheaper. * The flaw of mercantilism was viewed as a zero sum game with no winner. Smith and Ricardo proved that it was a positive sum game where all countries can benefit. * Free trade * Adam smith’s theory of absolute advantage proposed that free trade is beneficial to a country. Situation where the government doesn’t attempt to influence through quotas or duties what its citizens can buy from other countries or what they can produce and sell to another country. Outcome decided that import controls and export controls lead to a waste of resources. * Benefits of trade * Theories of Smith, Ricardo and Heckscher- Ohlin * They encourage countries to engage in international trade even for products it is able to produce itself. This allows the country to specialize in manufacture and export of products that can be produced most efficiently while importing products that can be produced more efficiently in other countries. Limits on trade interests domestic producers and hurts domestic customers. (Ex: USA specializes in air jets) * Product life cycle theory * Proposed by Raymond Vernon, which suggests that early in their life cycle, most products are produced in and exported