Read the summary and the most important questions on Trade and Factor Mobility

• 1 Interventionist and free trade theories

• 1.1 Mercantilism

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• Why is a trade surplus not necessarily beneficial?

  A country with a favorable balance of trade is supplying the other country with more than it receives.

• What measures can the government take?

  - increasing import barriers through higher tariffs and several non-tariff barriers.
  - focus on import reduction.

• 1.3 Free Trade Theory

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• Why do countries need to trade at all?

  No nation has all the natural resources , geographic conditions, and technology necessary to produce everything they consume

• 1.4 Theory of Absolute Advantage

• What is Adam Smith's theory of absolute advantage?

  A country's wealth is based on available goods and services for its residents rather than on gold.

• 1.4.1 Absolute Advantage

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• Specialization increases efficiency because:

  - Labor skills improve
  - Less time is lost by not switching production
  - It incentivizes better working methods

• 1.5 Theory of competitive advantage

• What happens when one country can produce all products at an absolute advantage?

  Global efficiency gains may still result from trade if a country specializes in what it can produce most efficiently.

• 1.5.1 comparative advantage

• What is comparative advantage by analogy?

  A country gains if it concentrates its resources on the commodities it can produce most efficiently, and then trades some of those for commodities produced abroad.

• 1.5.3 Don't confuse comparative and absolute advantage

• Explain why a country such as India may have simultaneously a comparative advantage and an absolute disadvantage in the production of the same product.

  India may be less efficient (more expensive) in the production of smart phones compared to a country such as Vietnam. However, the opportunity costs of producing smart phones in India are lower compared to the opportunity costs in Vietnam.

• 1.6 Theories of specialization: Some assumptions and limitations

• What are some limitations to specializations?

  - full employment
  - economic efficiency
  - divisions of gains
  - transport costs
  - insufficient demand
  - Statics and dynamics
  - Services
  - Production Networks
  - Mobility

• 2 Theories to explain national trade patterns

• 2.1.1 Theory of country size

• Bigger countries (in terms of land mass) differ in several ways from smaller countries. They:

  - Tend to export a smaller portion of output and import a smaller part of consumption
  -  have higher average transport costs for foreign trade