After studying this chapter you will be able to: Review the historical development of foreign exchange markets; explain how the foreign exchange rate reflects the demand and supply of goods, services, and assets, and the other flows that make up the balance of payments; explain geographic arbitrage, triangular arbitrage, and intertemporal arbitrage. | Theories of International Trade and Investment McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. chapter three Learning Objectives Explain the theories that attempt to explain why certain goods are traded internationally Discuss the arguments for imposing trade restrictions Explain two basic kinds of import restrictions: tariff and nontariff trade barriers 3- Learning Objectives Appreciate the relevance of changing status of tariff and nontariff barriers to managers Explain some of the theories of foreign direct investment 3- International Trade Theory Mercantilism Economic philosophy based on belief that (1) a nation’s wealth depends on accumulated treasure, usually gold, and (2) to increase wealth, government policies should promote exports and discourage imports 3- Theory of Absolute Advantage Absolute advantage Theory that a nation has absolute advantage when it can produce a larger amount of a good or service for the same amount of inputs as can another country or When it can produce the same amount of a good or service using fewer inputs than could another country 3- Absolute Advantage Each Country Specializes Example 3- Absolute Advantage Terms of Trade (Ratio of International Prices) Gains from Specialization and Trade 3- Theory of Comparative Advantage Comparative Advantage A nation having absolute disadvantages in the production of two goods with respect to another nation has a comparative or relative advantage in the production of the good in which its absolute disadvantage is less 3- Theory of Comparative Advantage Example Each Country Specializes 3- Comparative Advantage Terms of Trade – at a rate of ¾ bolt of cloth for 1 ton of soybeans Terms of Trade – at a rate of 1 bolt of cloth for 1 ton of soybeans Gains from Specialization and Trade 3- Comparative Advantage Production Possibility Frontiers (figure ) Figure 3- Heckscher-Ohlin Theory . | Theories of International Trade and Investment McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. chapter three Learning Objectives Explain the theories that attempt to explain why certain goods are traded internationally Discuss the arguments for imposing trade restrictions Explain two basic kinds of import restrictions: tariff and nontariff trade barriers 3- Learning Objectives Appreciate the relevance of changing status of tariff and nontariff barriers to managers Explain some of the theories of foreign direct investment 3- International Trade Theory Mercantilism Economic philosophy based on belief that (1) a nation’s wealth depends on accumulated treasure, usually gold, and (2) to increase wealth, government policies should promote exports and discourage imports 3- Theory of Absolute Advantage Absolute advantage Theory that a nation has absolute advantage when it can produce a larger amount of a good or
