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" The legal DNA of good economies"

Absolute Advantage Theory (Smith, 1776)

• division of labor
• advocate of free trade without government intervention
• countries should specialize in commodities in which they have an absolute advantage
• this would lead to an increase in world productivity, and thus to an increase in production and consumption
• Example:

The U.S. has an absolute advantage in producing wheat while Columbia has an absolute advantage in producing coffee.

Comparative Advantage (Ricardo, 1819)

• countries should specialize in commodities in which they have a comparative advantage
• this would also lead to an increase in world productivity
• Example:

Germany has an absolute advantage in both wheat and wine production.

The U.S. has a comparative advantage in wine production.

The Heckscher-Ohlin Theory (1919, 1933)

• different factor endowments explain why countries have advantages in different commodities
• two factor intensities: labor intensive or capital intensive factors
• factor intensities depend on the state of technology
• factor-price equalization theorem: differences in factor prices among countries will tend to diminish as countries engage in trade

• empirical test of Heckscher-Ohlin theory
• contradictory findings: U.S. imports were more capital-intensive than labor-intensive

• differences between types of goods
• for commodities and resource-intensive goods: trade is determined by relative costs of production and factor endowments
• for manufactured goods: trade is determined by similarities in product demands (because of market segments specified by product sophistication range and income level)

• relates to regions or markets in different stages of development - theory of shifting production location
• 3 stages: (1) new product in the home market; (2) mature product (exporting); and (3) standard product (seeking cost advantages in developing countries)

• focuses on cost and price
• two types of economies of scale: internal and external
• internal economies of scale will lead to intra-industry trade because of imperfect markets

• competitive advantage can be found at the firm level and at the national level
• 4 broad attributes of a nation constitute the diamond of national advantage: 1. Factor conditions, 2. Demand conditions, 3. Related and supported economies, and 4. Firm strategy, structure, and rivalry
• a firm can achieve two types of competitive advantages: low relative cost (efficiency) and differentiation (uniqueness)
• a firm can gain a competitive advantage through either configuration (concentrated to dispersed) or coordination (high to low) or both.
• General sources of competitive advantage: production, purchasing, financing, distribution, advertising scale economies, proprietary technology, brand/trade name, and human resource management.
• Competitive advantages erode over time
• Competitive advantages can be sustained through relentless improvement and upgrade

BOP Characteristics

• double-entry system
• always balanced
• cash-flow statement
• 2 types of transactions: real assets and financial assets

1. Current account
2. Capital and financial account
3. Official reserves
4. Net errors and omissions account

Examples of BOP entries

Credits

Debits

Current Account Sales of Boeing Aircraft to France  Sales of Phantom Jets to Saudi Arabia  Interest earned on loans to Brazil  Dividend on investment abroad. Patent fees for Dupont  Capital Account Inflows of other nationals' investment in property  Increase in private bank holdings in Miami  Reserve Increase in Citicorp's holdings of bank deposit and treasury (U.S.) bills by Saudi Arabia and Kuwait banks

Purchase Japanese Honda, German Mercedes Benz and French perfume  Purchase of Philipino service in Subic Bay  U.S. aid to South Korea, and remittance from U.S. citizens (for immigrants) to their parents abroad  Outlfows of U.S. in Middle East, Far East, and Latin America  Increase in U.S. deposits in Swiss banks  Net increase in holding of bank deposits by Federal Reserve in Bank of England and Deutsche Bank

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