Trade Theories, a Historical Approach
Read the overview below and complete the activities that follow.
Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country. The economic arguments surrounding the benefits and costs of free trade in goods and services are not abstract academic ones. International trade theory has shaped the economic policy of many nations for the past 50 years.
The textbook reviews six main trade theories: Adam Smith's theory of absolute advantage; David Ricardo's theory of comparative advantage; the Heckscher-Ohlin theory and the product life-cycle theory, which extend various aspects of Ricardo's theory; the new trade theory explaining the benefits from trade without national differences in resource endowments or technology; and Michael Porter's theory of national competitive advantage that draws attention to an international success in a particular industry. All these theories identify the specific benefits of international trade, help to explain the patterns of international trade, and government trade.
Match the correct theory with its corresponding description and time period in the evolution of international trade theory.1. Established in 1776, Adam Smith stated in this theory that countries should specialize in the production of goods and services for which they can produce most efficiently and then trade these for goods produced by other countries.A. Absolute advantage theory.B. New trade theory.C. Heckscher-Ohlin theory.D. National competitive advantage theory.E. Comparative advantage theory.F. Product life-cycle theory2. In 1817, David Ricardo stated that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries.A. Absolute advantage theory.B. New trade theory.C. Heckscher-Ohlin theory.D. National competitive advantage theory.E. Comparative advantage theory.F. Product life-cycle theory3. In the early 1900s, this theory predicts that countries will export those goods that make intensive use of factors that are locally abundant and import goods that make intensive use of factors that are locally scarce.A. Absolute advantage theory.
B. New trade theory.
C. Heckscher-Ohlin theory.
D. National competitive advantage theory.
E. Comparative advantage theory.
F. Product life-cycle theory4. In the mid-1960s, a theory initially proposed by Raymond Vernon, points out that where a new product is introduced is important. Over time, cost considerations start playing a greater role in the competitive process.A. Absolute advantage theory.B. New trade theory.C. Heckscher-Ohlin theory.D. National competitive advantage theory.E. Comparative advantage theory.F. Product life-cycle theory5. Emerging in the 1970s, this theory states that through its impact on economies of scale, trade can increase the variety of goods available to consumers while decreasing the average cost of those goods.A. Absolute advantage theory.B. New trade theory.C. Heckscher-Ohlin theory.D. National competitive advantage theory.E. Comparative advantage theory.F. Product life-cycle theory6. The most current theory was developed by Michael Porter and states that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage.A. Absolute advantage theory.B. New trade theory.C. Heckscher-Ohlin theory.D. National competitive advantage theory.E. Comparative advantage theory.F. Product life-cycle theory

1. Established in 1776, Adam Smith stated in this theory that countries should specialize in the production of goods and services for which they can produce most efficiently and then trade these for goods produced by other countries.

A. Absolute advantage theory.

2. In 1817, David Ricardo stated that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries.

E. Comparative advantage theory.

3. 3. In the early 1900s, this theory predicts that countries will export those goods that make intensive use of factors that are locally abundant and import goods that make intensive use of factors that are locally scarce.

C. Heckscher-Ohlin theory.

4. In the mid-1960s, a theory initially proposed by Raymond Vernon, points out that where a new product is introduced is important. Over time, cost considerations start playing a greater role in the competitive process.

F. Product life-cycle theory.

5. Emerging in the 1970s, this theory states that through its impact on economies of scale, trade can increase the variety of goods available to consumers while decreasing the average cost of those goods.

B. New trade theory.

6. The most current theory was developed by Michael Porter and states that four broad attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage.

D. National competitive advantage theory.

Explanation:

These various trade theories show where the world trade is coming from and where it is now. Indeed, it has come from a long place. Adam Smith commenced discussions on economic theories by first discussing the wealth of the nation. Currently, international trade is deviled by many national intrigues hindering free trade, including the threats posed by growing Chinese hegemony and national fears triggered by that country's unconventional trade practices.