International Trade and Money summary[211581]2023

Free Trade - -The absence of barriers to the free flow of goods and services btw countries. -Benefits of trade - -Common sense suggests that some international trade is beneficial. Theories of Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade even for products it is able to produce itself. It allows a country to specialize- produce more efficiently. One key insight of IT theory is that limits on import are often in the interests of domestic produces but not domestic consumers. -New Trade Theory: - -The observed pattern of trade in the world economy may be due in part to the ability of firms in a given market to capture first-mover advantages. Certain industries in the world market can support only a limited number of firms. Firms that enter the market first build a competitive advantage. Ex. Boeing -Mercantilism: - -An economic philosophy advocating that countries should simultaneously encourage exports and discourage imports. The mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade. They recommended policies to maximize exports and minimize imports. Imports were limited by tariffs and quotas, while exports were subsidized. -Explain the inconsistency David Hume found in the mercantilist doctrine with England and France as the example: - -If England had a balance-of-trade surpls with France (it exported more than it imported) the resulting inflow of gold and silver would swell the domestic money supply and generate inflation in England. France's money supply would contract and its prices would fall. This would encourage French to buy less English products and the English to buy more French goods (because they are so much cheaper now). Equals a deterioration of English balance of trade.