Ricardo's theory of comparative advantage
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Derived from Adam Smith's theory of Absolute Advantage. Comparative advantage disagrees with Absolute Advantage. It states that a country should specialize in the production of goods it can most efficiently produce. The country should buy from another country the goods it cannot efficiently produce, even if it can produce it better than the country its purchasing the goods from
-factor conditions: nations position in factors of production, such as skilled labor or the infrastructure necessary to compete in a given industry
-demand conditions: the nature of home demand for the industry's product or service
-related and supporting industries: the presence or absence of supplier industries that are internationally competitive
-firm strategy, structure, and rivalry: the conditions governing how companies are created, organized and managed and the nature of domestic rivalry

These 4 things create the DIAMOND ref. pg 187 #11
New Trade TheoryThe 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.Leontief's ParadoxLeontief built off Heckscher's Theory. Because the US is relatively abundant in capital compared to other nations, the US would be an exporter of capital-intensive goods and an importer of labor intensive goods. To his surprise, he found that the US exports were less capital intensive than the US imports.balance of paymentsnational accounts that track both payments and receipts from foreignersTrade CreationTrade created due to regional economic integration; occurs when high-cost domestic producers are replaced by low-cost foreign producers in a free trade area.trade diversionTrade diverted due to regional economic integration; occurs when low-cost foreign suppliers outside a free trade area are replaced by higher-cost suppliers within a free trade area.efficiency gainsProviding services or goods at a lower cost per unit of service or per unit of the good supplied.Paul Samuelsonthe dynamic gains from trade may not always be beneficial free trade may ultimately result in lower wages in the rich countryWhat is foreign direct investment?a capital investment that is owned and operated by a foreign entityFlow of FDIthe amount of FDI undertaken over a given time periodStock of FDIthe total accumulated value of foreign-owned assets at a given timewhat are the geographic trends of fdi?the past 35 years have seen a marked increase in both fow and stock of fdi in the world economy.. Over thr past 30 years fdi has accelerated faster than the growth in world trade and world output. see pg 226-227resource endowmentThe land, labor, capital, and related production factors a nation possessesLicensingOccurs when a firm (the licensor) licenses the right to produce its product, use its production processes, or use its brand name or trademark to another firm (the licensee). In return for giving the licensee these rights, the licensor collects a royalty fee on every unit the licensee sells.Greenfield InvestmentEstablishing a new operation in a foreign countrymergerCombination of two or more companies into a single firmacquisitionbuying an already established entity in foreign countryDunning's Eclectic ParadigmThree conditions determine whether or not a company will enter a given foreign country via FDI: ownership-specific advantages, location-specific advantages, internalization advantages OLIWhat is oligarchy?a small group of people having control of a country, organization, or institution.Knickerbocker's Theorysuggests that much FDI is explained by imitative behavior by rival firms in the global marketplaceEuropean UnionAn international organization of European countries formed after World War II to reduce trade barriers and increase cooperation among its members.CAFTACentral American Free Trade AgreementMecosurpact between argentina, brazil, paraguay and uraguay to establish a free trade areaAndean Pacta 1969 agreement between Bolivia, Chile, Ecuador, Columbia, and Peru to establish a customs unionNAFTA (North American Free Trade Agreement)Allows open trade between the US, Mexico, and Canada.European CommunityAn organization promoting economic unity in Europe formed in 1967 by consolidation of earlier, more limited, agreements. Replaced by the European Union (EU) in 1993.Economic Integrationoccurs when two or more nations join to form a free-trade zonePolitical Uniona central political apparatus coordinates economic, social, and foreign policyCustoms UnionA group of countries committed to (1) removing all barriers to the free flow of goods and services between each other and (2) the pursuit of a common external trade policy.Common Marketa group of countries committed to 1. removing all barriers to the free flow of goods, services, and factors of production between eachother; 2. the pursuit of a common external trade policyeconomic unionhas the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate and common monetary and fiscal policyfree trade areaeliminates all barriers to the trade of goods and services among member countrieswhat are the conditions to becoming full time member of eu?must respect democratic principlesexchange rate regimea rule governing policy toward the exchange ratemanaged float regimean exchange rate system in which central banks occasionally intervene to affect foreign exchange values; also called a dirty float regimeforward exchange ratewhat the exchange rate is projected to be in point in futurecurrency depreciationa decrease in the market value of one currency relative to another currencycurrency appreciationan increase in the market value of one currency relative to another currencyreciprocal exchangethe transfer of goods and services between two people or groups based on role obligationsEffective exchange ratethe exchange rate for a country relative to a weighted average of currencies of its trading partnersforward exchange ratetwo parties agree to exchange currencies on a specific future date and the rate is what they agree on to use in the transactionsPurchasing Power Paritythe basket price of goods should be relatively the same in each countryGresham's Lawbad money drives out good moneyInternational Fisher EffectFor any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between countries [(s1-s2)/s2]x100=i$ - iYlaw of one pricein competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the same currency