International Trade Essay

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Amy Sanderson Econ 301 Seminar Four Case Study International trade plays a major role in the economic development of a country. There are two schools of thought as regards trade. One school favors free trade while the other advocates protectionism. According to the theory of absolute advantage, if a country can produce a good cheaper than other countries, it would have absolute advantage in the production of that good. Countries should produce and export surpluses of goods in which it has absolute advantage and buy whatever else they need from other countries. According to the theory of comparative advantage, each country should produce a good in which it has a comparative advantage. The Heckscher-Ohlin model states that there are two types of products – labor intensive and capital intensive. The labor-rich country is likely to produce labor-intensive goods, while the country rich in capital is likely to produce capital-intensive goods. The two countries will then trade in these goods and reap the benefits of international trade. Imitation Gap theory considers the possibility of trade between two countries having the same factor endowments and consumer tastes. The International Product Life-Cycle (IPLC) theory, explains various stages in the life of a product and the resultant international trade. To protect domestic industries from competition, government imposes barriers. The barriers can be both tariff and non-tariff. Tariff barriers include ad-valorem duties, specific duties and compound duties. Non-tariff barriers include quotas, subsidies, licensing, administered protection, and health and safety standards. A closed economy is a country which has no trade relations with other countries of the world. An open economy is one which has relations with other economies of the world in order to exchange goods, services, and investments. The world is becoming

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