Trade Theories

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Trade Theories by Mind Map: Trade Theories

1. Trade helps countries balance their economy by importing low cost goods from others and, at the same time, exporting goods to other countries.

2. Mercantilism

2.1. Economic practice used by governments whose ideal is to export goods in order to favor the country.

2.1.1. Export goods were usually larger than the import ones as it was seen as favourable

2.1.2. It was the economic system for the major trading nations during the 16th, 17th and 18th centuries

2.1.3. Known in england as Commercial system, in France as Colbertism and in Germany and Austria as Cameralism

3. Absolute Advantage

3.1. It refers to the way a country manages to produce certain product using low cost resources, making it reasonably priced and more efficiently for its export.

3.1.1. Introduced by Adam Smith in 1776

3.1.2. A country can use the Absolute Advantage by using their resources to produce the goods where they have the advantage and then engage in free trade practices with other countries.

4. Country Similarity

4.1. Country Similarity runs on the idea that, in order to engage in a good trade with other countries, they must have diferences in the goods they produce in order to balance the imports and exports.

4.1.1. Ideally, developed countries who have ways to produce more manufactured goods would have to partner with countries wich main production is in their primary products, that way they would make a balance trade among the goods that go in and out of the country.

5. Comparative Advantage

5.1. It refers to the ability, resources and cost of production of one country to produce a good A more efficiently than good B, and then engage in a trade agreement with another country whose abilities to produce good B are greater than good A, creating a win-win trade for both countries.

5.1.1. Introduced by David Ricardo in 1817

6. Product Life Cycle

6.1. Products must go through a cycle if they want to be exported and sold internationaly, and as a result for exposure it matures and ultimately declines.

6.1.1. Stage 1: Introduction and growth. On this stage the product is introduced localy and will stay local until sales increase by gaining the interest of the general public. the product may go through multiple changes or modifications until it gets enough exposure to be exported.

6.1.2. Stage 2: Maturity. the product may go through more modifications to fit the countries demands. The producer may also consider the opening of production plants in countries where the demand increases to decrease the exporting costs.

6.1.3. Stage 3: Decline. As a product gains interest, it also gains competitors, and as new products gain more clients, old ones lose its novelty. The demand usually starts declining in the country where the product started as new products rise with lower costs or innovative features, meanwhile the main producer looks for ways to decrease production costs. Ultimately, countries will start buying local productions as its usually less expensive than the exported product.